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Xerox Corp. (BB63)

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Thursday 27 April, 2000

Xerox Corp.

1st Quarter Results

Xerox Corp
25 April 2000


For additional information contact:

Leslie F. Varon                       
Director, Investor Relations               
203-968-3100                                   
[email protected]                                                      
           
Charles K. Wessendorf 
Manager, Investor Relations
203-968-3489 
[email protected]

800 Long Ridge Road
Stamford, Connecticut 06904
Fax: (203) 968-3944
http://www.xerox.com/investor

XEROX FIRST QUARTER EARNINGS 30 CENTS PER SHARE BEFORE PREVIOUSLY ANNOUNCED
CHARGES

'We have made meaningful and measurable progress in many areas.
But there is a great deal more to accomplish.' 

STAMFORD, Conn., April 25, 2000 -- Xerox Corporation (NYSE:XRX) today announced
earnings of 30 cents per share before two previously announced charges. First
quarter pre-currency revenue increased 6 percent, or 3 percent excluding the
Tektronix printer division acquisition. First quarter post-currency revenue was
$4.4 billion, all inclusive, compared to $4.3 billion in the first quarter of
1999. 

'Xerox people have delivered to expectations, and in many areas we have made
meaningful and measurable progress,' said Rick Thoman, Xerox president and chief
executive officer. 'But there is a great deal more to accomplish.' 

First quarter income of $220 million was down 36 percent compared with $343
million a year ago. After the $444 million after-tax impact associated with a
major restructuring program, which was announced March 31, and the in-process
research and development charge from the Tektronix acquisition ($27 million
pre-tax), the quarter reflected a loss of $243 million. 

Several of the issues affecting performance in the second half of 1999 improved
in the first quarter, including better business results from Brazil and Fuji
Xerox, progress in resolving problems associated with the U.S. customer
administration reorganization, and greatly diminished Y2K-related impacts. 

Several of the 1999 issues will affect performance moving forward in 2000,
including: increased competitive pressures; adverse foreign currency, which
reduced earnings by more than 5 cents in the first quarter; and, to a
significant degree, the process of rebuilding customer account relationships
following the realignment of the sales force earlier this year to an industry
solutions focus. 

'The magnitude of these sales force changes clearly impacted performance in the
first quarter,' said Thoman. 'Moving forward we are committed to improving
levels of sales productivity throughout the year as we benefit from our industry
and solutions orientation.' 

Pre-currency revenue grew 19 percent in General Markets Operations (GMO), which
includes the new Tektronix business, sales agents, concessionaires, retailers,
resellers, and Internet and telesales in North America and Europe. Revenue grew
15 percent in Developing Market Operations (DMO), which includes Latin America,
China, Russia, India, the Middle East and Africa. Pre-currency revenue was flat
across Industry Solutions Operations (ISO), primarily the direct sales force in
North America and Europe. The company realized an increase of approximately $40
million in first quarter revenue associated with excellent growth in licensing
patents from its intellectual property portfolio and selling standalone
software. 

During the quarter, Xerox announced a series of significant new products that
will be available later in the year, including a new fleet of 45 and 60 page per
minute DocuColor digital printing systems and a 155 page per minute DocuTech
production publisher. The company also announced a major alliance with Fuji
Xerox and Sharp for the production and sale of a new class of inkjet printers
for the small and home office. 

Color sales in the first quarter grew by 64 percent (26 percent excluding
Tektronix), led by the fast-selling DocuColor 12 and Document Center Color
Series 50 digital copier/printers, and the Tektronix color printer line. 

The company cited issues from the sales force realignment as the primary factor
behind weak equipment sales in North America and Europe, especially at the high
end of the product line. This impacted gross margins, which declined by 3.9
points to 42 percent. Gross margins were also affected by other factors, most
notably higher growth in the lower margin document outsourcing and channels
businesses. 

Sales, administrative and general expenses were 27.8 percent of revenue in the
first quarter compared with 27.2 percent last year. 

Thoman reiterated his belief that 2000 will be a year of two distinct halves. 

'We continue to expect a significant year-over-year decline in second quarter
earnings due to the impacts of the sales force transition, increased
competition, our customer administration turnaround and adverse currency
translation,' he said. 'However, we believe we are on track to achieve
meaningful earnings growth in the second half of the year. The combination of
this increased momentum in the second half of the year and benefits from our
recently announced restructuring program positions us for mid- to high-teens
earnings growth in 2001.' 

On March 31, Xerox announced a worldwide restructuring program to enhance its
competitive position and further align its cost structure to the demands of the
digital industry. The company took a pre-tax charge of $625 million ($444
million after-tax, including $18 million related to Xerox' share of a Fuji Xerox
restructuring charge) to cover the costs of the program, which will include the
elimination of 5,200 positions, the closing and consolidation of facilities and
the write-down of certain assets. 


For additional information about The Document Company Xerox, please visit our
Worldwide Web Site at http://www.xerox.com/Investor.

Xerox Corporation

Financial Summary

                                                             Three Months
                                                            Ended March 31,
                                                                          %
(in millions, except per-share data)                 2000      1999   Growth

Revenues                                          $ 4,431    $ 4,300      3%

Net Income (Loss)

Income before restructuring and Tektronix in-     $   220    $   343    (36%)
  process research and development
  (IPRD) charges
Restructuring and IPRD charges                       (463)         -      *
Net Income (Loss)                                 $  (243)   $   343   (171%)

Basic Earnings (Loss) per Share
Income before restructuring and IPRD              $   .31    $   .50    (38%)
  charges
Restructuring and IPRD Charges                       (.69)         -       *

Basic Earnings (Loss) per Share                   $  (.38)   $   .50   (176%)

Diluted Earnings (Loss) per Share
Income before restructuring and IPRD              $   .30    $    .48    (38%)
  charges
Restructuring** and IPRD charges                     (.68)         -      *

Diluted Earnings (Loss) per Share                 $  (.38)    $   .48   (179%)


*Calculation not meaningful
**Impact of restructuring charge limited due to antidilutive restrictions



Xerox Statement of Income
(Without Restructuring and Tektronix in-process R&D)

                                                  Three Months
                                                  Ended March 31,
                                                                          %
(in millions, except per share data)              2000        1999       Growth
Revenues
  Sales                                          $2,291     $ 2,120         8%
  Service, outsourcing, financing and rentals     2,140       2,180        (2%)

Total Revenues                                    4,431       4,300         3%
   Costs and Expenses
   Cost of sales                                  1,269       1,114        14%
   Cost of service, outsourcing, financing and    1,301       1,213         7%
    rentals
   Research and development expenses                249         251        (1%)
   Selling, administrative and general expenses   1,231       1,171         5%
   Gain on affiliate's sale of stock                (21)         -          *
   Other, net                                        99          57        74%
 
   Total Costs and Expenses                       4,128       3,806         8%

Income before Income Taxes, Equity Income and
Minorities' Interests                               303         494       (39%)
   Income taxes                                      94         153       (39%)
   Equity in net income of unconsolidated affiliates 22          10       120%
   Minorities' interests in earnings of subsidiaries 11           8        38%

   Net Income                                    $  220       $ 343      (36%)

Calculation of
Earnings Per Share

Net Income                                       $  220      $  343      (36%)

Basic Earnings per Share
Preferred dividends, net of tax and other           (11)        (10)      10%
   Income available for common                   $  209       $ 333      (37%)
Adjusted average shares outstanding                 666.7       660.9

Basic Earnings per Share                         $   .31     $  .50      (38%)

Diluted Earnings per Share
ESOP expense adjustment, net of tax              $   -       $    3         *
Interest on convertible debt, net of tax             -            3         *

  Income available for common                    $   220     $  349      (37%)
Adjusted average shares outstanding                 727.9      734.9

Diluted Earnings per Share                       $   .30     $  .48      (38%)

*Calculation not meaningful


      Xerox Statement of Income (GAAP Basis)

                                                   Three Months
                                                  Ended March 31,
                                                                       %
          (in millions, except per-share data)        2000     1999    Growth
Revenues
  Sales                                             $2,291  $  2,120    8%
  Service, outsourcing, financing and rentals        2,140     2,180   (2%)
  Total Revenues                                     4,431     4,300    3%
Costs and Expenses
  Cost of sales                                      1,269     1,114   14%
  Cost of service, outsourcing, financing and rentals1,301     1,213    7%
  Inventory charges                                    119       -       *
  Research and development expenses                    249       251   (1%)
  Selling, administrative and general expenses       1,231     1,171    5%
  Restructuring charge and asset impairments           506        -      *
  Gain on affiliate's sale of stock                    (21)       -      *
  Tektronix in-process research and development
            costs                                       27        -      *
  Other, net                                            99        57    74%
  Total Costs and Expenses                           4,780     3,806    26%
Income (Loss) before Income Taxes (Benefits),         (349)      494  (171%)
Equity Income and Minorities' Interests
    Income Taxes (Benefits)                           (113)      153  (174%)
    Equity in net income of unconsolidated affiliates    4        10   (60%)
    Minorities' interests in earnings of subsidiaries   11         8    38%
Net Income (Loss)                                    $(243)   $  343  (171%)

Calculation of
Earnings (Loss) Per Share

Net Income (Loss)                                    $(243)      343  (171%)

Basic Earnings (Loss) per Share
Preferred dividends, net of tax and other              (11)      (10)   10%
   Income (Loss) available for common             $   (254)    $ 333  (176%)
Adjusted average shares outstanding                    666.7     660.9
Basic Earnings (Loss) per Share                   $   (.38)   $  .50  (176%)

Diluted Earnings (Loss) per Share**
ESOP expense adjustment, net of tax               $    (11)        3      *
Interest on convertible debt, net of tax                 -         3      *
      Income (Loss) available for common          $   (254)   $  349   (173%)
Adjusted average shares outstanding                    666.7     734.9
Diluted Earnings (Loss) per Share                 $  (.38)    $  .48   (179%))

*Calculation not meaningful

**Impact of restructuring charge limited due to antidilutive restrictions


Financial Review

Summary

First  quarter  2000  pre-currency revenues grew 6 percent  including  the
beneficial  impact  of the January 1, 2000 acquisition of  the  Tektronix,
Inc.   Color  Printing  and  Imaging  Division  (CPID).  Excluding   CPID,
pre-currency revenues grew 3 percent reflecting flat revenues in  Industry
Solutions  Operations, growth of 6 percent in General  Markets  Operations
and  15  percent growth in Developing Markets. First quarter 2000 revenues
included  an  increase  of  approximately  $40  million  associated   with
excellent  growth  in  licensing patents from  our  intellectual  property
portfolio  and  selling  standalone  software.  Including  the  effect  of
adverse  currency translation and the beneficial CPID impact,  total  2000
first  quarter revenues grew 3 percent to $4.4 billion compared with  $4.3
billion in the 1999 first quarter.

Income in the 2000 first quarter declined 36 percent to $220 million  from
$343  million in the 1999 first quarter before an after-tax charge of $444
million  (including  our  $18  million share  of  a  separate  Fuji  Xerox
restructuring   charge)  in  connection  with  the  company's   previously
announced  worldwide restructuring program and a previously announced  $27
million   before-tax   charge  for  acquired   in-process   research   and
development  associated with the CPID acquisition. This  decline  in  2000
first quarter income included significant gross margin deterioration.  The
January,  2000  final  phase  of  the  realignment  of  the  direct  sales
organization  to  an  industry  and solutions  approach  necessitated  the
establishment  of  many  new  customer relationships,  resulting  in  weak
equipment sales in North America and Europe, particularly in the high  end
of  our  business. In addition, higher growth in the lower-margin document
outsourcing   and   channels  businesses  and  unfavorable   product   mix
continued.  As  expected,  the CPID acquisition adversely  impacted  first
quarter  income by approximately two cents, as the synergies we expect  to
capture  from  the  integration will not offset the  higher  goodwill  and
interest  expense  until  later in 2000. Equity  income  from  Fuji  Xerox
improved  in  the 2000 first quarter reflecting improved business  results
and favorable currency translation.

Including  the effect of the restructuring charge and the charge  for  the
acquired CPID inprocess research and development costs, we had a net  loss
of $243 million in the 2000 first quarter.

Diluted earnings per share declined 38 percent to $0.30 in the 2000  first
quarter  from  $0.48  in  the  1999  first  quarter,  excluding  the  2000
restructuring  charge and the acquired CPID in-process R&D  charge.  First
quarter  2000  earnings  per share included an unfavorable  year-over-year
currency  impact of approximately five cents. Including both charges,  the
first quarter 2000 loss was $0.38.

Pre-Currency Growth

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

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  9  percent stronger in the 2000 first quarter  than  in  the
1999  first  quarter. As a result, currency translation had an  unfavorable
impact of approximately three percentage points on revenue growth.

Revenues

Total  pre-currency  revenues grew 6 percent  in  the  2000  first  quarter
including  the beneficial impact of the January 1, 2000 CPID  acquisition.
Excluding CPID, pre-currency revenues grew 3 percent.

Beginning this quarter we have changed our revenue reporting to provide  a
more  meaningful  portrayal  of the results. The  former  product  revenue
reporting  highlighted  the  impact  of  the  transition  from  light-lens
copiers  to  digital products. Now that we have successfully  transitioned
(digital  products  represented  53  percent  of  1999  full  year   total
revenues), our new product revenue reporting focuses on the major  product
categories:  black  and  white production, black and  white  office/SOHO
(small  office/home  office), and color. We have also changed  our  former
geographical  reporting  to  conform to our new  organizational  alignment
which  was  fully completed at the beginning of 2000 and which  represents
the  basis for our 2000 Segment Reporting beginning with our first quarter
2000  Form  10-Q.  The  responsibilities of  each  of  the  organizational
components are described in the applicable revenue reporting section  that
follows.

Revenue By Major Product Category

For the major product categories, the pre-currency revenue growth rates
are as follows:

                                       1999                  2000
                                                      FY
                                                    Total
                         Q1   Q2    Q3    Q4    FY    $*      Q1
      Total Revenues    (1)%  4%     2%   (3)%  -%  $19.2      6%

      B&W Office/SOHO   (2)   1      -    (4)  (1)    8.3      -
      B&W Production    (2)   2      1    (8)  (2)    5.9     (5)
      Color              8   10     11     1    7     1.8     64

      Memo: Fuji Xerox  (1)  (3)     -     7    1    $7.8      2

*Revenues  are  pre-currency except Total and Fuji Xerox. Dollars  are  in
 billions.  Revenues  include  major product categories  only  and  exclude
 paper and some small operations.

Black  & White Office and Small Office/Home Office (SOHO) revenues include
our  expanding family of Document Centre digital multi-function  products,
light-lens  copiers under 90 pages per minute, our DocuPrint N  series  of
laser  printers and digital copiers sold through indirect sales  channels,
and  facsimile  products. A modest office copying revenue  decline  and  a
decline  in  indirect channels laser printers were essentially  offset  by
growth  in indirect channels copier and facsimile revenues. Black &  white
office  copying  revenue declined as equipment sales  declined  reflecting
lower light-lens copier installations  and increased competitive and pricing
pressures partially  offset by  higher  Document  Centre installations. The
sales force  realignment  to  an industry  basis  necessitated the establishment
of  new  customer  relationships resulting  in  weaker  equipment sales.
Equipment sale declines  were  partially offset  by  modest  recurring revenue
growth. Black  &  White  Office  and  SOHO revenues represented 43 percent of
first quarter 2000 revenues compared with  45 percent in the 1999 first quarter.

Black  & White Production revenues, which include DocuTech, Production Printing,
and  light-lens copiers over 90 pages per minute, declined 5 percent in the 2000
first  quarter from the 1999 first quarter. DocuTech revenues declined  slightly
in  the  2000 first quarter as equipment sales were weak due to the sales  force
realignment  and  unfavorable product mix. Production printing revenues  in  the
2000  first  quarter declined slightly from the 1999 first quarter as  excellent
growth  in Developing Markets was essentially offset by weak revenues  in  North
America. Production light-lens revenues declined significantly in the 2000 first
quarter  from  the  1999  first quarter as the transition  to  digital  products
continued  and pricing pressures accelerated. Black & White Production  revenues
represented 25 percent of first quarter 2000 revenues compared with  28  percent
in the 1999 first quarter.

Color  Copying  and Printing revenues grew 64 percent in the 2000 first  quarter
from  the  1999  first  quarter  including the beneficial  impact  of  the  CPID
acquisition.  Excluding  CPID,  color revenues  grew  26  percent  reflecting  a
significant  acceleration  from recent trends. Growth reflects  the  exceptional
success  of our recently-introduced Docucolor 12 and Document Centre ColorSeries
50,  the  first  color-enabled digital multi-function  product.  Inkjet  revenue
growth  was  also  excellent as unit placements grew  significantly  and  supply
revenues accelerated reflecting the growing installed population. Including  the
CPID  acquisition, color revenues represented 14 percent of first  quarter  2000
revenues compared with 9 percent in the 1999 first quarter.

Revenue By Organization

The pre-currency revenue growth rates by organization are as follows:

                              1999                     2000
                               FY
                                S*                       Q1

Total Revenues                $19.2                      6%

Industry Solutions Ops.       $10.2                      -
General Markets Ops.            4.7                     19
Developing Markets Ops.         2.7                     15

*Revenues  are  pre-currency except Total. Dollars  are  in  billions.  Revenues
include major organizations only and exclude some smaller operations.

Industry  Solutions Operations covers the direct sales and service organizations
in North America and Europe. Revenues were flat in the 2000 first quarter as the
January, 2000 final phase of the realignment of the direct sales organization to
an   industry   approach  necessitated  establishment  of  many new   customer
relationships.  The  competitive environment intensified in  North  America  and
Europe   and  pricing  pressure  continued  and  intensified,  particularly   in
light-lens copiers in the U.S. Revenue growth
in  the  2000  first  quarter was essentially flat in the  U.S.,  good  in
Canada,  and strong in the U.K., but revenues declined modestly in  France
and Germany.

General  Markets  Operations  includes  sales  agents  in  North  America,
concessionaires in Europe and our Channels Group which includes  retailers
and  resellers and our expanding Internet sales and telebusiness.  General
Markets  Operations  revenues grew 19 percent in the  2000  first  quarter from
the  1999  first  quarter including the CPID acquisition.  Excluding
CPID,  General  Markets revenues grew 6 percent in the 2000 first  quarter
as  excellent Channels recurring revenue growth from the growing installed
equipment  population was partially offset by temporarily weak  monochrome
and  color  laser  printer equipment sales as the  Xerox  office  printing
business was integrated with CPID.

Developing Market Operations includes operations in Latin America,  China,
Russia,  India,  the  Middle East and Africa. First quarter  2000  revenue
growth  was strong in Brazil reflecting an improving economic environment,
a  stable currency and activity growth. First quarter 2000 revenue  growth
was  excellent  in  China and strong growth was evident in  several  other
countries.

Fuji  Xerox  Co., Ltd., an unconsolidated entity jointly  owned  by  Xerox
Limited  and  Fuji Photo Film Company Limited, develops, manufactures  and
distributes   document  processing  products  in  Japan,  Australia,   New
Zealand,  and other areas of the Pacific Rim. Excluding CPID,  Fuji  Xerox
revenues  grew  2  percent  in the 2000 first  quarter  reflecting  modest
revenue  growth  in Japan and strong revenue growth in Fuji  Xerox'  other
Asia Pacific territories.

Revenue By Type

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

                                       1999                  2000
                            Q1    Q2     Q3     Q4    FY       Q1

     Equipment Sales        (3)%  2%     5%    (8)%   (2)%     5%
     Recurring Revenues      1    4      -      -      1       6
       Total Revenues       (1)%  4%     2%    (3)%    -%      6%

     Memo:
     Document Outsourcing*  31    34     32    16     26       22

      *Includes equipment accounted for as equipment sales.


Equipment  sales  grew 5 percent in the 2000 first quarter  including  the
beneficial  impact  of  the  CPID acquisition. Excluding  CPID,  equipment
sales   grew  1  percent  including  excellent  growth  in  Brazil   where
installations  increased  across all product  lines.  Equipment  sales  in
North  America  and  Europe were adversely affected  by  the  sales  force
realignment,   intensified   competition  and   some   increased   pricing
pressures.

Recurring  revenues,  including  revenues from  service,  document  outsourcing,
rentals, standalone software, supplies, paper and finance income, represent  the
revenue stream that follows equipment placement. These revenues are primarily  a
function  of  our installed population of equipment, usage levels,  pricing  and
interest  rates.  Recurring revenues in the 2000 first quarter  grew  6  percent
compared with the 1999 first quarter. Excluding CPID, recurring revenues grew 3
percent.  Recurring revenues benefited from continued strong growth in  document
outsourcing, supplies growth from our growing installed population of inkjet and
laser  printers  and copiers sold through indirect channels and increased  paper
pricing and volume growth. Recurring revenues in the 2000 first quarter included
approximately  $40  million  of  increased  licensing  and  standalone  software
revenues representing excellent growth from the licensing of a number of patents
from  our  intellectual  property portfolio. Recurring revenues  were  adversely
impacted by lower service revenues reflecting lower equipment sales and the page
volume  impact of pages diverted from light-lens copiers to printers which have
not  been  fully  offset by page volume increases on network-connected  Document
Centre  multifunction  products. Finance income was lower  largely  due  to  the
unfavorable impact of the 1999 finance receivables securitizations.

Total  Document Outsourcing revenues grew 22 percent in the 2000  first  quarter
which is an improvement from the 1999 fourth quarter.

Key Ratios and Expenses

The trend in key ratios was as follows:

                                    1999                      2000
                      Q1         Q2    Q3     Q4     FY       Q1

Gross Margin          45.9%    45.3%  43.3%  41.8%  44.0%     42.0%
SAG % Revenue         27.2     25.8   26.1   27.8   26.8      27.8%

The  gross  margin declined by 3.9 percentage points in the 2000  first  quarter
from  the  1999  first quarter or 3.5 percentage points excluding CPID. Higher
revenue  growth in the lower-margin document outsourcing and channels businesses
represented approximately 1.5 percentage points of the decline. In addition, the
gross margin was adversely impacted by weak DocuTech equipment sales due to  the
sales  force  realignment,  unfavorable  product  mix,  unfavorable  transaction
currency  and some decline in service gross margins as service revenue  declines
have  not  yet  been accompanied by corresponding cost reductions. Manufacturing
and other productivity improvements offset competitive price pressures and gross
margin benefited by approximately 0.5 percentage points from increased licensing
and  stand-alone software revenues associated with the licensing of a number  of
patents from our intellectual property portfolio.

Selling,  administrative and general expenses (SAG) grew 7 percent in  the  2000
first  quarter including the CPID acquisition as the impact of the U.S. customer
administration issues and transition costs associated with the creation  of  our
European  shared services organization was only partially offset by the benefits
of our 1998 restructuring program  and  expense controls. In the 2000 first
quarter, SAG represented 27.8  percent of revenue compared with 27.2 percent of
revenue in the 1999 first quarter.

Research  and  development (R&D) expense in the  2000  first  quarter  was
essentially flat with the 1999 first quarter as increased program spending
was  offset  by  lower  overhead  expenses.  We  continue  to  invest   in
technological development to maintain our position in the rapidly changing
document  processing  market  with  an  added  focus  on  increasing   the
effectiveness  and  value of that investment. Xerox R&D  is  strategically
coordinated with Fuji Xerox which invested $555 million in R&D in the 1999
full year, for a combined total of $1.5 billion.

Worldwide  employment  increased by 1,600 in the  2000  first  quarter  to
96,200 as a result of our acquisition of CPID with 2,200 employees, which
was  partially offset by 600 employees leaving the company under the  1998
worldwide restructuring program.

Gain on affiliate's sale of stock reflects our proportionate share of  the
increase  in  equity  of  Scansoft  Inc.  (NASDAQ:  SSFT)  resulting  from
Scansoft's issuance of stock in connection with an acquisition. This  gain
is  partially  offset  by  a $5 million charge  reflecting  our  share  of
Scansoft's  write-off  of in-process research and  development  associated
with  this  acquisition, which is included in Equity  in  net  income  of
unconsolidated affiliates. Scansoft, an equity affiliate, is  a  developer
of  digital imaging software that enables users to leverage the  power  of
their scanners, digital cameras, and other electronic devices.

The  $42  million  increase in other expenses, net, from  the  1999  first
quarter  largely  reflects increased non-financing  interest  expense  and
goodwill   amortization  associated  with  the   January, 2000   CPID
acquisition,  lower aggregate currency exchange gains and the  absence  of
several  one-time gains in 1999. These increases were partially offset  by
reduced Y2K remediation spending.

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

Income  before  income taxes, excluding the restructuring charge  and  the
CPID inprocess research and development (IPRD) charge declined 39 percent
to  $303  million in the 2000 first quarter from $494 million in the  1999
first  quarter.  Including the restructuring and IPRD  charges,  the  loss
before income taxes was $349 million in the 2000 first quarter.

The  effective tax rate before the restructuring charge and the CPID  IPRD
charge was 31.0 percent in the 2000 first quarter which is consistent with
the  1999  first quarter and 1999 full year rate. We expect the underlying
2000 tax rate to be similar to the 1999 full year rate. The effective  tax
rate of 32.4 percent including the restructuring and IPRD charges reflects
the mix of restructuring provisions in various countries.

Equity  in net income of unconsolidated affiliates is principally  our  50
percent share of Fuji Xerox income. Total equity in net income before  our
$18  million  share  of  a  separate Fuji  Xerox  restructuring  increased
significantly  in  the 2000 first quarter reflecting improved  Fuji  Xerox
business  results and favorable currency translation. This  was  partially
offset  by  the  $5  million charge reflecting  our  share  of  Scansoft's
in-process research and development write-off.

On  March  31,  2000  we  announced details of a  worldwide  restructuring
program  designed to enhance shareholder value, spur growth and strengthen
the  company's  competitive  position  in  the  digital  marketplace.   In
connection  with this program, in the first quarter of 2000 we recorded  a
pre-tax provision of $625 million ($444 million after taxes including  our
$18  million  share of the Fuji Xerox restructuring charge).  This  charge
includes  severance costs related to the elimination of  5,200  positions,
net  worldwide  through a combination of voluntary programs  and  layoffs.
The  charge  also includes $190 million related to facility  closings  and
other asset write-offs such as scrapping certain inventory.

The  pre-tax  savings from this restructuring plan, net of  implementation
costs,  are  expected  to be approximately $95 million  in  2000  and  an
incremental  $300 million in 2001. These savings are not  expected  to  be
reinvested. Approximately 60% of the savings are expected in SAG with  the
balance  in other activities. With respect to the headcount reductions  we
expect  that approximately 3,400 positions will be eliminated by  the  end
of 2000 and the balance in early 2001.

On   April  7,  1998,  we  announced  a  worldwide  restructuring  program
associated  with  enhancing  our competitive  position  and  lowering  our
overall  cost  structure. In connection with this program, we  recorded  a
second  quarter  1998 pre-tax provision of $1,644 million ($1,107  million
after  taxes and including our $18 million share of a restructuring charge
recorded  by Fuji Xerox). The program includes employment reductions,  the
closing  and  consolidation of facilities, and the write-down  of  certain
assets.

As  of March 31, 2000, approximately 10,700 employees had left the company
under  the 1998 restructuring program. The reserve balance of $319 million
at  March  31, 2000 relates to cash expenditures to be incurred  primarily
during  2000  for certain European initiatives that extended  beyond  1999
due  to  local  regulatory issues and practices  as  they  relate  to  the
workforce.

On  January  1,  2000 we acquired the Tektronix, Inc. Color  Printing  and
Imaging  Division  (CPID) for $925 million in cash including  $75  million
paid  by  Fuji  Xerox  for  the  Asia Pacific  operations  of  CPID.  This
transaction  will  result  in goodwill and other  identifiable  intangible
assets  of approximately $637 million, which will be amortized over  their
useful  lives,  predominantly 20 years. In addition, we recognized  a  $27
million  pretax  charge in the 2000 first quarter for acquired  in-process
research and development associated with this acquisition.

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 Form
10-K. We do not intend to update these forward-looking statements.

                                                                                                                                                                                                                                                    

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