Interim Results

RNS Number:4806H
Xerox Corp
25 July 2001


For additional information contact:

Leslie F. Varon
Director, Investor Relations
203-968-3110
[e-mail]


                    XEROX ANNOUNCES SECOND QUARTER EARNINGS

          " .. we have clearly turned the corner in improving liquidity 
                  and restoring Xerox's financial strength."

STAMFORD, Conn., July 25, 2001 -- Xerox Corporation (NYSE:XRX) today announced a
second quarter operations loss of 10 cents per share, which includes currency
losses of 2 cents. Including net restructuring charges, gains from the early
retirement of debt and a charge associated with the disengagement from the small
office/home office (SOHO) business, the company reported a second quarter loss
of 40 cents per share.

"Despite weaknesses in the economy that are impacting overall sales, the
effective execution of Xerox's turnaround is on track and resulting in improved
financial performance," said Paul A. Allaire, chairman and chief executive
officer.

"Xerox is delivering progress in key areas of the business, including cost
reduction as well as improvement in inventory turnover and gross margins," said
Anne M. Mulcahy, president and chief operating officer. "We delivered strong
operational cash flow in the second quarter, and have clearly turned the corner
in improving liquidity and restoring Xerox's financial strength."

At the end of the second quarter, Xerox had $2.2 billion cash on hand and net
debt was down $700 million from the first quarter of 2001, The company also
reported continued progress in the reduction of inventory by approximately $200
million, reduced capital spending and improved receivables' performance.

Second quarter revenue was $4.1 billion, 13 percent lower than the second
quarter of last year. Pre-currency revenue declined 12 percent from the second
quarter 2000. Year-over-year pre-currency revenue declines of 4 percent in North
America and 7 percent in Europe represent in part a weakened economic
environment that impacted equipment sales. A 33 percent revenue decline in
developing markets is driven by the company's reconfiguration of its Latin
American operations.

"over the past year, we've taken the necessary actions to streamline our
business and build on core growth opportunities in the production printing and
networked office markets with a focus on color, services and solutions," said
Mulcahy. "While year-over-year revenue slowed, we delivered sequential
pre-currency revenue gains in North America and Europe, increased profitability
in North America and continued progress in our European operations - clear
evidence of the overall improvement in our core operations."

Mulcahy also said that Xerox is ahead of schedule in achieving its $1 billion
cost-reduction target with the implementation of actions that account for more
than 75 percent of the year-end goal, including the reduction of 8,600 jobs
worldwide since Sept. 2000.

For the second quarter, gross margins were 36.4 percent, 38.1 percent excluding
SOHO - a sequential improvement from the first quarter of 2001 gross margins of
33.6 percent. Selling, general and administrative expenses declined 7 percent
from second quarter 2000. Research and development spending remained flat at 6
percent of revenue reflecting the company's continued commitment to innovation
and new product development.

Xerox's second quarter earnings include unhedged currency losses of 2 cents per
share compared to a 5-cent gain in the first quarter.

The company also reported a 28-cent charge related to the disengagement from the
SOHO business. Xerox announced in June its intent to discontinue its line of
personal inkjet and xerographic products sold primarily through retail channels.
The company will continue to provide service, support and supplies for its
customers who own Xerox SOHO products. In the second quarter of 2001, Xerox
recorded a $84 million worldwide pre-tax loss in its SOHO business. Worldwide
revenues for SOHO were $108 million, representing 3 percent of total
second-quarter revenues.

Commenting on expectations for the balance of the year, Mulcahy said that the
adverse impact of a weakened economy is delaying customers' purchasing decisions
-a trend that is not expected to turn in the third quarter. "Our challenge for
the second half of 2001 is driving growth in weakened economic markets. We
continue to expect a return to profitability in the second half of 2001, but the
economic environment and normal third-quarter seasonality will likely delay this
to the fourth quarter," added Mulcahy.

In related news, Xerox confirmed that it had further strengthened liquidity
through the sale of $513 million in asset-backed securities. Including cash
proceeds received this week from the sale, Xerox's current net cash balance
increases to approximately $2.6 billion.


For additional information about The Document Company Xerox, please visit our
Worldwide Web site at www.xerox.com/investor.

This release contains forward-looking statements and information relating to
Xerox that are based on our beliefs as well as assumptions made by and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intend," "will" and similar expressions, as they relate
to us, are intended to identify forward-looking statements. Actual results could
differ materially from those projected in such forward-looking statements.
Information concerning certain factors that could cause actual results to differ
materially is included in the company's first quarter Form 10-Q.

XEROX(R), The Document Company(R) and the digital X(R) arc trademarks of XEROX
CORPORATION.



Xerox Corporation

Financial Summary

                                 Three Months                Six Months
                                Ended June 30,             Ended June 30,

                                              %                           %
(in millions,             2001       2000   Growth     2001       2000  Growth
except per-share
data)


Revenues                $ 4,137     $ 4,778   (13)    $ 8,339    $ 9,318  (11)


Net Income (Loss)

Income (Loss) before    $   (68)    $   201     *     $  (120)    $  394    *
special items, 
extraordinary item &
cumulative effect of
change in accounting
principle
SOHO disengagement         (196)          -     *        (196)         -     *
charge
Restructuring &             (35)          1     *         (96)      (441)    *
Tektronix IPRD charges
Gain on sale of half          -           -     *         300          -     *
of interest in Fuji
Xerox
Income (Loss) before        (299)       202     *        (112)       (47)    *
extraordinary gain &
cumulative effect of
change in accounting 
principle
Extraordinary gain, net       18          -      *          35         -     *
Cumulative effect of           -          -      *          (2)        -     *
change in accounting
principle

Net income (Loss)        $  (281)    $  202      *      $  (79)   $  (47)  (68)


Diluted Earnings (Loss)
per Share

Income (Loss) before     $  (.10)    $  .27      *     $  (.19)   $  .56     *
special items,
extraordinary item &
cumulative effect
of change in accounting
principle
SOHO disengagement          (.28)         -       *       (.28)        -     *
charge
Restructuring &
Tektronix IPRD 
charges                     (.05)         -       *       (.14)     (.66)   79
Gain on sale of half           -          -       *        .43         -     *
interest in Fuji
Xerox

Diluted Earnings (Loss)     (.43)       .27       *       (.18)     (.10)  (80)
per share before 
extraordinary gain &
cummulative effect of
change in accounting
principle

Extraordinary gain, net     (.03)         -       *        .05         -     *
Cumulative effect of           -          -       *          -         -     *
change in accounting
principle           

Diluted Earnings (Loss)  $  (.40)    $  .27       *    $  (.13)   $  (.10) (30)
per Share


* Calculation not meaningful



Xerox Statements of Income

                                Three Months                Six Months
                                Ended June 30,             Ended June 30,

                                              %                           %
(in millions,             2001       2000   Growth     2001       2000   Growth
except per-share
data)


Revenues              

Sales                   $ 1,981     $ 2,569   (23%)   $ 4,036    $ 4,920  (18%)
Service, outsourcing,
financing and rentals     2,156       2,209    (2%)     4,303      4,398   (2%)

Total Revneues            4,137       4,778   (13%)     8,339      9,318  (11%)


Costs and Expenses

Cost of sales             1,354       1,535   (12%)     2,787      2,878   (3%)
Cost of service,          1,278       1,313    (3%)     2,633      2,642    -
outsourcing, financing
and rentals
Inventory charges            24           -      *         24         90   (73%)

Research and development    249         254    (2%)       495        506    (2%)
expenses 
Selling, administrative   1,263       1,377    (8%)     2,415      2,647    (9%)
and general expenses
Resturcturing charge        291          (2)     *        391        504   (22%)
and asset impairments 
Gain on sale of half          -           -      -       (769)         -      *
of interest in Fuji Xerox
Gain on affiliate's sale      -           -      -          -        (21)     *
of stock
Purchased in-process          -           -      -          -        (27)     *
research and development
Other, net                  161          54      *        251        159    58%

Total Costs and Expenses  4,620       4,531     2%      8,227      9,432   (13%)


Income (Loss) before       (483)        247      *        112       (114)     *
Income Taxes (Benefits),
Equity Income and 
Minorities' Interests

Income taxes (benefits)    (160)         79      *        243        (40)     *

Income (Loss) after        (323)        168      *       (131)       (74)  (77%)
Income Taxes (Benefits)    
before Equity Income and 
Minorities' Interests
Equity in net income of      30          46    (35%)       32         50   (36%)
unconsolidated affiliates
Minorities' interests in      6          12    (50%)       13         23   (43%)
earnings of subsidiaries

Net Income (Loss) before   (299)        202      *       (112)       (47)     *
extraordinary gain and
cumulative effect of 
in accounting principle

Extraordinary gain           18           -      *         35          -      *
on early extinguishment
of debt

Cumulative effect of          -           -      *         (2)         -      *
change in accounting
principle

Net Income (Loss)        $ (281)     $  202      *     $  (79)     $  (47) (68%)


Calculation of Earnings
(Loss) Per Share

Net Income (Loss)        $ (281)     $  202       *     $  (79)    $  (47) (68%)


Diluted Earnings (Loss) 
per Share

ESOP expense adjustment,      -           -        -       (12)         -     *
net of tax
Preferred dividends, net      -          (7)       *         -         (17)   *
of tax and other 
Interest on convertible       -           1        *         -           -    *
debt, net of tax

Income (Loss) available    (281)        196        *       (91)       (64) (42%)
for common
Adjusted average shares   700.5       728.8              689.3      667.0
outstanding

Diluted Earnings (Loss) $  (.40)    $   .27         *   $ (.13)   $  (.10) (30%)
per Share


* Calculation not meaningful



Financial Review 

Summary

The Company has restated its 1999 and 1998 consolidated financial statements.
This restatement has also impacted the quarterly financial information
previously presented for the quarters ended June 30, 2000. These restatements
are the result of two separate investigations conducted by the Audit Committee
of the Board of Directors involving previously disclosed issues in our Mexico
operations and a review of our accounting policies and procedures and the
application thereof. The restatements are fully discussed in the Form 10-K filed
June 27 2001 and the Form 10-Q filed July 12, 2001 with the Securities and
Exchange Commission.

The following table presents the effects of the adjustments on pre-tax income
(loss):

                                                   Three Months Ended
                                            June 20, 2001     June 30, 2000

Increase (decrease) to pre-tax
income (loss):

Mexico                                             $ -                $82 
Lease issues, net                                   15                 23 
Other, net                                           -                (17) 

Total                                              $15                $88

Throughout the following Financial Review all referenced amounts reflect the
above described restatement adjustments.

Total second quarter 2001 revenues of $4.1 billion declined 13 percent (12
percent pre-currency) from $4.8 billion in the 2000 second quarter. 2001 second
quarter year over year pro-currency revenue declines of 4 percent in North
America and 7 percent in Europe reflected in part, a weakened economic
environment that impacted equipment sales. Developing Markets Operations second
quarter 2001 revenues were 33 percent below the 2000 second quarter as we
reconfigure our Latin American Operations to a new business approach
prioritizing cash and profitable revenue.

Including a $196 million after-tax charge associated with the company's
disengagement from the small office/home office (SOHO) business, an additional
net after-tax restructuring provision of $35 million associated with the
company's previously announced Turnaround Program and an $18 million after tax
gain on early retirement of debt, the second quarter 2001 net loss was $ 281
million. Excluding all these special items, the second quarter 2001 loss was $68
million including a loss of $56 million in our worldwide SOHO operations from
which we have recently announced our disengagement. Second quarter 2000 net
income was $202 million. The 2001 second quarter loss reflected the revenue
decline as well as a gross margin decline partially offset by lower SAG expenses
reflecting the continuing benefits from our Turnaround Program.

Including the $0.28 SOHO disengagement charge. $0.05 restructuring provision and
the $0.03 gain from the early retirement of debt, our loss per share was $0.40
in the 2001 second quarter. Excluding these items the second quarter 2001 loss
per share was $0.10 compared with $0.27 earnings per share in the 2000 second
quarter.

Liquidity
The company's worldwide cash balance at June 30, 2001 was $2.2 billion versus
$1.7 billion at December 31, 2000. Total debt, net of cash on hand at June 30,
2001, was $14.1 billion, reflecting reductions of approximately $0.7 billion
from March 31, 2001 and $2.3 billion from December 31, 2000. The decreases from
March 31, 2001 largely reflect the impacts of completed asset sales, operational
cash generation and $0.3 billion of debt exchanged for shares of common stock.

Inventory at June 30, 2001 declined approximately $1 billion from the June 30.
2000 level, approximately $350 million from December 31, 2000 and approximately
$200 million from March 31, 2001. These declines largely reflect continued
management actions to improve inventory turns. The management actions have been
successful in breaking the historical pattern of inventory levels increasing in
the first half of the year. Second quarter 2001 days sales outstanding improved
by approximately 8 days from the 2000 second quarter and by approximately 2 days
from the 2001 first quarter.

At June 30, 2001 the company had approximately $1.4 billion of debt obligations
expected to be repaid during the remainder of 2001. Of this amount,
approximately $0.4 billion and $1.0 billion are expected to be repaid in the
third and fourth quarters, respectively.

The company continues to implement global initiatives to reduce costs, improve
operations and sell certain assets that we believe will positively affect our
capital resources and liquidity position when completed. The company's objective
is to fund the debt maturities in 2001 with cash on hand, operating cash flows,
proceeds from asset sales and other liquidity and financing initiatives.

In January 2001 the company received $435 million in financing from GE Capital
secured by the Xerox portfolio of lease receivables in the U.K.   In March 2001
the company completed the sale of one half of its interest in Fuji Xerox Co.,
Ltd. to Fuji Photo Film Co., Ltd. for $1,283 million in cash. In April 2001 the
company sold its leasing businesses in four European countries to Resonia
Leasing AB for proceeds of approximately $370 million. Under the terms of the
agreement, Resonia will provide ongoing exclusive equipment financing to Xerox
customers in those countries. These transactions are part of our plan to
transition customer equipment financing to third-party vendors. In July 2001 the
company sold $513 million of asset backed securities supported by U.S. finance
receivables bringing our worldwide cash balance to approximately $2.6 billion as
of July 24.

A fuller discussion of the company's liquidity is included in the Form 10-Q
filed July 12, 2001 with the Securities and Exchange Commission.



Pro-Currency Growth

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

A substantial portion of our consolidated revenues is derived from operations
outside of the United States where the U.S. dollar is not the functional
currency. When compared with the average of the major European and Canadian
currencies on a revenue-weighted basis, the U.S. dollar was approximately 6
percent stronger in the 2001 second quarter than in the 2000 second quarter. As
a result, currency translation had an unfavorable impact of approximately two
percentage points on revenue growth.


Segment Analysis

Revenues and year-over-year revenue growth rates by segment are as follows:

                                                                  2Q 2001 
                                                               Post Currency
            2000
            Full
            Year         Pre-Currency Revenue Growth
            Rev-              2000                     2001
            enues   Q1   Q2     Q3     Q4     FY    Q1      Q2     Rev-  Growth
                                                                   enues
  
Total       $18.7   8%   -%    (2)%   (9)%   (1)%   (5)%   (12)%   $4.1    (13)%
Revenues

Production    6.3   1    (2)   (8)   (12)    (6)    (2)     (8)    (1.5)   (10)
Office        7.1   4     5     4     (3)     2      3      (5)     1.7     (6)
Small         0.6  35    (3)   (2)     1      6    (24)    (30)     0.1    (31) 
Office /
Home
Office
Deve-         2.5  36     4    (3)   (21)     -     (21)    (31)    0.4    (33)
loping
Markets       
Other         2.2   7    (9)   (1)    (4)    (2)    (16)    (17)    0.4    (19)

Memo: Color   2.9  64    60    74     54     62      17       1     0.7     (1)


 Dollars are in billions. 2000 pre-currency revenue growth includes the
beneficial impact of the January 1, 2000 acquisition of the Tektronix, Inc.
Color Printing and Imaging Division.

Production revenues include DocuTech, Production Printing, color products for
the production and graphic arts markets and light-lens copiers over 90 pages per
minute sold predominantly through direct sales channels in North America and
Europe. Second quarter 2001 revenues declined 10 percent (8 percent
pre-currency). Monochrome production revenues declined reflecting the weaker
economic environment and continued movement to distributed printing and
electronic substitutes. Post equipment install revenues continue to be adversely
affected by reduced equipment placements in earlier quarters. Production color
revenues grew modestly reflecting continued strong sales of the successful
Docucolor 2000 series which began shipments in June, 2000, partially offset by
Docucolor 30/40 and mid-range color revenue declines. Production revenues
represented 35 percent of second quarter 2001 revenues compared with 34 percent
in the 2000 second quarter.   Second quarter 2001 gross margin for the
production segment declined from the 2000 second quarter primarily as a result
of the greater proportion of our gross profits from lower margin color equipment
sales.


Office revenues include our family of Document Centre digital multi-function
products; light-lens copiers under 90 pages per minute; and our color laser,
solid ink and monochrome laser desktop printers, digital copiers and facsimile
products sold through direct and indirect sales channels in North America and
Europe. Second quarter 2001 revenues declined 6 percent (5 percent pre-currency)
from the second quarter 2000. Black and white copying revenues declined as
strong Document Centre installations, including the Document Centre 480 which
prints and copies at 75 pages per minute, was more than offset by increased
pricing pressures, continued light lens declines and our decision in Europe to
reduce our participation in very aggressively priced competitive customer bids
and tenders as we reorient our focus from marketshare to profitable revenue.
Shipments of the recently announced Document Centre 490, the fastest in its
class at 90 pages-per-minute will begin in September. Excellent 2001 second
quarter monochrome laser printing revenue growth reflected excellent equipment
sales and supplies revenue growth. Good office color revenue growth was driven
by continued excellent placements and strong Document Centre colorSeries 50
recurring revenue growth. The Document Centre colorSeries 50 is the industry's
first color-enabled digital multi-function product. Office revenues represented
41 percent of second quarter 2001 revenues compared with 38 percent in the 2000
second quarter. Second quarter 2001 gross margin for the office segment improved
from the 2000 second quarter primarily as a result of stabilizing Document
Centre margins, facilitated by strong Document Centre 480 placements, and
improvements in laser and solid ink printers.

Small Office/Home Office (SOHO) revenues include inkjet printers and personal
copiers sold through indirect channels in North America and Europe. On June 14
we announced our disengagement from the SOHO business. Second quarter 2001 SOHO
revenues declined 31 percent (30 percent pre-currency) from the 2000 second
quarter and gross margin declined significantly in a very difficult market
environment. SOHO revenues represented 2 percent of second quarter 2001 revenues
compared with 3 percent in the 2000 second quarter.

Developing Markets Operations (DMO) includes operations in Latin America,
Russia, India, the Middle East and Africa. Second quarter 2001 revenue declined
significantly in Brazil from the 2000 second quarter reflecting reduced
equipment placements and lower prices as the company focused on reducing
inventory and transitioning its business model to maximize cash rather than
market share, compounded by a 21 percent devaluation in the Real. Second quarter
2000 revenues in Brazil included a $35 million structured transaction but there
were no similar arrangements in the 2001 second quarter.

Revenue declined throughout the other Latin American countries due to weaker
economies and our decision to focus on cash and profitable revenue generation
rather than market share. The Middle East and Africa had good revenue growth in
the 2001 second quarter and Russia had excellent revenue growth. DMO incurred a
substantial pre-tax loss in the second quarter 2001. Gross margin declined in
DMO as a result of lower equipment and service margins primarily due to an
increased competitive environment, currency devaluation not offset by price
increases, lower selling prices as we focused on reducing inventory, weak mix,
and the absence of any structured transaction in Brazil.


Revenue By Type
The pre-currency growth rates by type of revenue are as follows:

                                           2000            ___      2001

                              Q1      Q2      Q3     Q4      FY       Q1    Q2

Equipment Sales               13%    (1)%    (9)%   (21)%    (8)%    (13)% (27)%

All Other Revenues             6      1       2       1       2       (2)    (3)

Total Revenues                 8%    -%      (2)%    (9)%    (1)%     (5)% (12)%

2000 pre-currency revenue growth includes the beneficial impact of the January
1, 2000 acquisition of the Tektronix, Inc. Color Printing and Imaging Division

Second quarter 2001 equipment sales declined 27 percent from the second quarter
2000 reflecting the weaker economic environment resulting in deferrals of some
capital purchases and increased competitive pricing pressures. DMO represented
10 percentage points of the decline. 2001 second quarter equipment sales
declined 8 percent in North America and 21 percent in Europe from the second
quarter 2000.

All other revenues, including revenues from service, document outsourcing,
rentals, standalone software, supplies, paper and finance income, represent the
revenue stream that follows equipment placement. All other revenues in the 2001
second quarter declined 3 percent from the second quarter 2000. Approximately
one percentage point of the decline was due to the December 2000 sale of our
China Operations and the transfer of certain accounts to Georgia Pacific
following the June 2000 sale of our North American commodity paper business.  
Second quarter 2001 revenues declined 2 percent in North America and grew 2
percent in Europe from the second quarter 2000.

Document Outsourcing revenues are split between Equipment Sales and all other
revenues. Where document outsourcing contracts include revenue accounted for as
equipment sales, this revenue is included in Equipment Sales, and all other
document outsourcing revenues, including service, equipment rental, supplies,
paper, and labor are included in all other revenues. Document Outsourcing,
excluding equipment sales revenue, grew 13 percent in the 2001 second quarter
and the gross margin improved. The backlog of future estimated document
outsourcing revenue was $8.6 billion in the 2001 second quarter, a 3 percent
decline from the 2000 second quarter largely due to a focus on only entering
those contracts with satisfactory margins.

Key Ratios and Expenses

The trend in key ratios was as follows:
 
                                   2000                              2001
                       Q1       Q2     Q3      Q4      FY         Q1       Q2   
        
Gross Margin          39.1%*  40.4%   35.0%   35.1%   37.4%*     33.6%   35.8%**

SAG % Revenue         28.0    28.8     31.7   32.2    30.2       27.4    30.6

*Includes inventory charges associated with the 2000 restructuring. If excluded
the gross margin would have been 41.1 percent and 37.9 percent, respectively.

**Includes inventory charges associated with the SOHO disengagement. If excluded
the gross margin would have been 36.4 percent.


Including inventory charges associated with the SOHO disengagement, the second
quarter 2001 gross margin declined by 4.6 percentage points from the 2000 second
quarter. Excluding these charges, the second quarter 2001 gross margin of 36.4
percent declined by 4.0 percentage points from the 2000 second quarter.
Approximately 2 percentage points of the year over year decline were due to weak
performance in Developing Markets Operations. Increased SOHO price pressures and
unfavorable mix resulted in one percentage point of the decline. Cost savings
and productivity improvements resulting from our Turnaround Program offset
increased pricing pressures. Improved asset management practices, lower activity
levels and unfavorable mix adversely impacted gross margin. Excluding the gross
margin in the SOHO operations, the gross margin in the 2001 second quarter was
38.1 percent.

Selling, administrative and general expenses (SAG) declined 8 percent (7 percent
pre-currency) in the 2001 second quarter from the second quarter 2000 reflecting
continued benefits from our Turnaround Program including significantly lower
labor costs and advertising and marketing communications spending. These
reductions were partially offset by professional costs related to our regulatory
filings and related matters and higher costs incurred by Developing Markets
Operations in the renegotiation of customer contracts associated with
implementation of their new business approach. Second quarter 2001 bad debt
provisions of $123 million were $12 million lower than the 2000 second quarter.

Research and development (R&D) expense was $5 million lower in the 2001 second
quarter than the 2000 second quarter due to lower inkjet spending in our SOHO
operations reflecting our disengagement from this business. R&D spending was 6
percent of revenue in the 2001 second quarter as we continue to invest in
technological development, particularly color, to maintain our position in the
rapidly changing document processing market. Xerox R&D remains technologically
competitive and is strategically coordinated with Fuji Xerox.

Worldwide employment declined by 2,300 in the 2001 second quarter to 85,600
primarily as a result of employees leaving the company under our restructuring
programs. Excluding divestitures, worldwide employment has declined by 8,600
since implementation of our Turnaround Program in October, 2000.

Other, net was $161 million in the 2001 second quarter compared to $54 million
in the second quarter 2000. Second quarter 2000 results benefited from gains of
$75 million associated with the sale of the North American commodity paper
business and other assets. In the second quarter 2001 we incurred $14 million of
net currency losses resulting from the remeasurement of unhedged foreign
currency-denominated assets and liabilities and $6 million of mark-to-market
losses recorded as a result of the new accounting required under FAS 133. Due to
the inherent volatility in the foreign currency markets, the company is unable
to predict the amount of any such mark-to-market gains or losses in future
periods. Second quarter 2001 net non-financing interest expense of $90 million
was $3 million lower than the 2000 second quarter.

During the fourth quarter of 2000 we announced a Turnaround Program in which we
outlined a wide-ranging plan to sell assets, cut costs and strengthen our
strategic core. We announced plans that were designed to reduce costs by at
least $1.0 billion annually, the majority of which will affect 2001. As part of
the cost cutting program, we continue to take additional charges for finalized
initiatives under the Turnaround Program. As a result of these actions, in the
second quarter of 2001 we provided an incremental $41 million to complete our
open initiatives under the Turnaround plan. We expect additional provisions will
be required in 2001 as additional plans are finalized. The restructuring reserve
balance at June 30, 2001 for both the Turnaround Program and the March 2000
program amounted to $156 million.

In June 2001, the Ad Hoc Committee of the Board of Directors approved the
disengagement from our SOHO business. In connection with this disengagement, we
recorded a second-quarter pretax charge of $274 million ($196 million after
taxes). The charge includes provisions for the elimination of approximately
1,200 jobs worldwide by the end of 2001, the closing of facilities and the
write-down of certain assets to net realizable value.  The charges associated
with this action include approximately $37 million in employee termination
costs, $146 million of asset impairments, $24 million in inventory charges, $25
million in purchase commitments. $25 million in decommitment costs, and $17
million in other miscellaneous charges. The SOHO disengagement reserve balance
at June 30, 2001 was $103 million.

Over the remainder of the year we will discontinue our line of personal inkjet
and xerographic printers, copiers, facsimile machines and multi-function devices
which are sold primarily through retail channels to small offices, home offices
and personal users (consumers). We intend to sell the remaining inventory
through current channels. We will continue to provide service, support and
supplies, including the manufacturing of such supplies, for customers who
currently own SOHO products during a phase-down period to meet customer
commitments.

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

Pre-tax income (loss) was $(483) million in the 2001 second quarter including
the SOHO disengagement and Turnaround restructuring provisions. Excluding these
items, the pre-tax loss was $(169) million in the 2001 second quarter. The 2000
second quarter pre-tax income of $247 million included a $2 million
restructuring credit.

The effective tax rate, including the tax benefit related to the SOHO
disengagement provision and the additional restructuring provision, was 33.2
percent in the 2001 second quarter. Excluding these items and other tax
adjustments, the underlying 2001 second quarter tax rate was 42.0 percent
compared to 32.0 percent in the 2000 second quarter. The increase in the
underlying effective tax rate from 32.0 percent to 42.0 percent in 2001 is due
primarily to continued losses in a low-tax rate jurisdiction.

Equity in net income of unconsolidated affiliates is principally our 25 percent
share of Fuji Xerox income. Total equity in net income declined by $16 million
in the 2001 second quarter from the second quarter 2000 due to our reduced
ownership in Fuji Xerox. Our share of total Fuji Xerox net income of $29 million
in the 2001 second quarter decreased by $19 million from the 2000 second
quarter.

In March 2001, we retired $122 million of long-term debt through the exchange of
15.5 million shares of common stock valued at $94 million. From April 1, 2001
through June 30, 2001 we retired an additional $205 million of debt through the
exchange of 20.7 million shares of common stock valued at $179 million. The
second quarter retirements results in a pre-tax extraordinary gain of $30
million ($18 million after taxes) for a net equity increase of approximately
$197 million.

In the second quarter of 2001, we sold our leasing businesses in four European
countries to Resonia Leasing AB for proceeds of approximately $370. These sales
are part of an agreement under which Resonia will provide on-going, exclusive
equipment financing to our customers in those countries.

The SEC is continuing its investigation into Mexican accounting issues and other
accounting matters. The company is continuing to fully cooperate with the
investigation. The company cannot predict when the SEC will conclude its
investigation or its outcome.

Forward-Looking Statements
This earnings release and financial review contain forward-looking statements
and information relating to Xerox that are based on our beliefs as well as
assumptions made by and information currently available to us.  The words
"anticipate," "believe," "estimate," "expect," "intend," "will" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements.  Actual results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors that could
cause actual results to differ materially is included in the company's first
quarter 2001 10-Q filed with the SEC. We do not intend to update these
forward-looking statements.