Xerox Corporation

Xerox Fourth-Quarter Earnings Exceed Expectations Through Strong Sales
                           of New Technology

--  Earnings per share of 22 cents

--  11 percent equipment sale growth

--  1 percent revenue growth; total revenue of $4.3 billion

--  Operating cash flow of $1 billion; year-end cash balance of $2.5 billion

Xerox Corporation (NYSE: XRX) announced today better-than-expected
fourth-quarter earnings that reflect strong sales of the company's
industry-leading color systems and office digital products as well as
continued operational excellence through disciplined cost management.

The company reported fourth-quarter 2003 earnings per share of 22
cents including a 3-cent positive effect from a reduced litigation
reserve.

"Xerox is operating on full throttle with winning results," said Anne
M. Mulcahy, Xerox chairman and chief executive officer. "Our 2003
performance - capped by a successful fourth quarter - is proof
positive that the Xerox value proposition is clicking with customers
and that our strengthened operations are delivering sustainable
benefits."

Technology Investments Fuel Equipment Sales

Equipment sales grew 11 percent in the fourth quarter including a
currency benefit of 7 percentage points. About 60 percent of all
equipment sales in the quarter were generated from products launched
in the past two years, reflecting a strong return on investment. Total
revenue for the fourth quarter was $4.3 billion, an increase of 1
percent from the fourth quarter of 2002 including a currency benefit
of 6 percentage points. Revenue growth was adversely affected by
declining post-sale revenue from the company's older light lens
technology and its exit in 2001 from the small office/home office
business.

Total fourth-quarter revenue from the company's targeted growth areas
- office digital, production digital and value-added services - grew
10 percent year over year and now represent about 73 percent of the
company's revenue. Xerox also noted significant progress in its
developing markets operations, which delivered total revenue growth of
1 percent in the quarter and 21-percent equipment sales growth.

Revenue from color products grew 20 percent in the fourth quarter and
is a key driver of Xerox's growth strategy as the increasing volume of
pages printed on Xerox's color systems flows through to post-sale
revenue.

"Major fourth quarter wins with customers like Office Depot,
Microsoft, United Technologies, Bechtel and Owens Corning represent
just a sample of large enterprises who depend on Xerox's integrated
technology and services for more efficient workflow and lower cost,
higher quality document management," added Mulcahy.

Driving the New Business of Printing

Through the company's production business, Xerox continues to lead
"the new business of printing" by helping commercial printers and
document-intensive industries make the transition from offset to the
more dynamic world of digital.

Production color installs grew 19 percent in the quarter reflecting
strong sales of the Xerox DocuColor 6060 and DocuColor iGen3 digital
color presses as well as initial placements of the DocuColor 5252,
which launched in October. In its first full year of availability, the
iGen3 has won widespread customer acceptance and is now sold in 34
markets worldwide. Progressive Impressions International, a global
developer of technology-based marketing solutions including one-to-one
print applications enabled by Xerox innovation, ordered 6 iGen3
systems last month - the largest iGen3 contract to date.

Installs of production monochrome products increased 22 percent
primarily driven by accelerated demand for the Xerox 2101 digital
light production system, which partially offset install declines in
production publishing.

Digitizing the Office

Xerox has nearly doubled its portfolio of digital office systems in
the last year and now has the industry's broadest line of
award-winning products for offices small to large. Installs of Xerox
office monochrome systems were up 22 percent in the fourth quarter as
demand increased for the company's competitively priced digital
copiers and multifunction devices. Office color multifunction installs
grew 25 percent and office color printing was up 30 percent due to the
success of Xerox's DocuColor 3535, WorkCentre 24, WorkCentre Pro 32
and WorkCentre Pro 40 color systems as well as the Phaser 7300 and
Phaser 8200 color printers.

Market-making Innovation

Building on its 2003 success, Xerox said that it's making a
significant announcement later this week that further broadens its
portfolio of systems and services for both production and office
environments.

"The new offerings will create noise in the marketplace, capture our
customers' attention and put our competitors back on their heels,"
said Mulcahy. 

Operational Excellence

The company's lean and flexible business model continued to deliver
positive operational results including fourth-quarter gross margins of
42.5 percent. Selling, administrative and general costs decreased $23
million or 2 percent from fourth quarter 2002, including an adverse
currency impact of 4 percentage points.

Efficient working capital management contributed to significant
fourth-quarter operating cash flow of about $1 billion and a year-end
cash position of $2.5 billion.

Commenting on the first quarter, Mulcahy said, "We expect consistent
positive performance with services-led technology wins that will
continue to drive equipment sales growth. From commercial print shops
that use Xerox systems to grow their businesses to offices of any size
that rely on us for productivity solutions, the Xerox equation of
innovative technology plus document management expertise will continue
to deliver strong results for our stakeholders."

Full-Year 2003 Results

For full-year 2003, Xerox reported:

--  Net income of $360 million or 36 cents per share, including a previously
    announced 17-cent litigation charge and a 5-cent charge for the remaining
    unamortized fees associated with the company's terminated 2002 credit
    facility.

--  Equipment sale revenue of $4.3 billion, an increase of 7 percent from $4
    billion in 2002, including a 6 percentage point currency benefit.

--  Total revenue of $15.7 billion, a decline of 1 percent from $15.8 billion in
    2002, including a 5 percentage point currency benefit.

--  Debt reduction of $3 billion.

--  Operating cash flow of $1.9 billion.

--  Year-end cash balance of $2.5 billion.

                                 -XXX-

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 Form 10-Q for the quarter ended
September 30, 2003, as filed with the SEC. 

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

                           Xerox Corporation
        Condensed Consolidated Statements of Income (Unaudited)

(in millions,         Three Months Ended           Year Ended
 except per share        December 31,              December 31,
 data)               2003  2002(1) % Change    2003  2002(1) % Change
------------------  -----------------------   -----------------------

Revenues
   Sales            $2,082  $1,914       9%   $6,970  $6,752       3%
   Service,
    outsourcing
    and rentals      1,962   2,093      (6%)   7,734   8,097      (4%)
   Finance income      248     239       4%      997   1,000      (0%)
                    ---------------           ---------------
Total Revenues       4,292   4,246       1%   15,701  15,849      (1%)

Costs and Expenses
   Cost of sales     1,316   1,176      12%    4,436   4,233       5%
   Cost of service,
    outsourcing
    and rentals      1,066   1,104      (3%)   4,311   4,494      (4%)
   Equipment
    financing
    interest            88     101     (13%)     362     401     (10%)
   Research and
    development
    expenses           200     218      (8%)     868     917      (5%)
   Selling,
    administrative
    and general
    expenses         1,112   1,135      (2%)   4,249   4,437      (4%)
   Restructuring
    and asset
    impairment
    charges            120     408     (71%)     176     670     (74%)
   Provision for
    litigation         (61)      -      (a)      239       -      (a)
   Gain on
    affiliate's
    sale of stock        -       -      (a)      (13)      -      (a)
   Other expenses,
    net                116     163     (29%)     631     590       7%
------------------  ---------------           ---------------
Total Costs and
 Expenses            3,957   4,305      (8%)  15,259  15,742      (3%)
------------------  ---------------           ---------------

Income (loss)
 before Income
 Taxes, Equity
 Income,
 Minorities'
 Interests and
 Cumulative Effect
 of Change in
 Accounting
 Principle (b)         335     (59)     (a)      442     107      (a)
   Income taxes
    (benefits)         123     (72)     (a)      134       4      (a)
------------------  ---------------           ---------------

Income before
 Equity Income,
 Minorities'
 Interests and
 Cumulative Effect
 of Change in
 Accounting
 Principle             212      13      (a)      308     103      (a)
   Equity in net
    income of
    unconsolidated
    affiliates          15      11      36%       58      54       7%
   Minorities'
    interests in
    earnings of
    subsidiaries        (5)     (5)      0%       (6)     (3)   (100%)
------------------  ---------------           ---------------

Income before
 Cumulative Effect
 of Change in
 Accounting
 Principle             222      19      (a)      360     154      (a)
   Cumulative
    effect of
    change in
    accounting
    principle            -       -      (a)        -     (63)     (a)
------------------  ---------------           ---------------

Net Income          $  222  $   19      (a)   $  360  $   91      (a)
   Less: Preferred
    stock
    dividends, net     (25)    (10)     (a)      (71)    (73)      3%
------------------  ---------------           ---------------

Income Available
 to Common
 Shareholders       $  197  $    9      (a)   $  289  $   18      (a)
==================  ===============           ===============

Basic Earnings per
 share:
   Income before
    cumulative
    effect of
    change in
    accounting
    principle       $ 0.25  $ 0.01      (a)   $ 0.38  $ 0.11      (a)
   Cumulative
    effect of
    change in
    accounting
    principle            -       -      (a)        -   (0.09)     (a)
                    ---------------           ---------------
   Net Income Per
    Share           $ 0.25  $ 0.01      (a)   $ 0.38  $ 0.02      (a)
==================  ===============           ===============

Diluted Earnings
 per share:
   Income before
    cumulative
    effect of
    change in
    accounting
    principle       $ 0.22  $ 0.01      (a)   $ 0.36  $ 0.10      (a)
   Cumulative
    effect of
    change in
    accounting
    principle            -       -      (a)        -   (0.08)     (a)
                    ---------------           ---------------
   Net Income Per
    Share           $ 0.22  $ 0.01      (a)   $ 0.36  $ 0.02      (a)
==================  ===============           ===============

    Note: Certain reclassifications of prior year amounts have been
made to these financial statements to conform to the current year
presentation.

(a) Percent not meaningful.

(b) Referred to as "pre-tax income (loss)" throughout the remainder of
    this document.

(1) Amounts include reclassifications for the effect of adoption of
    FIN 46R as described herein.


                           Xerox Corporation
           Condensed Consolidated Balance Sheets (Unaudited)

                                               December     December
                                                  31,          31,
(in millions)                                    2003         2002(1)
--------------------------------------------  ------------------------
Assets

Cash and cash equivalents                     $    2,477   $    2,887
Accounts receivable, net                           2,159        2,072
Billed portion of finance receivables, net           461          564
Finance receivables, net                           2,981        3,088
Inventories                                        1,152        1,231
Other current assets                               1,105        1,187
--------------------------------------------  ------------------------
  Total Current Assets                            10,335       11,029
Finance receivables due after one year, net        5,371        5,353
Equipment on operating leases, net                   364          450
Land, buildings and equipment, net                 1,827        1,757
Investments in affiliates, at equity                 644          695
Intangible assets, net                               325          360
Goodwill                                           1,722        1,564
Deferred tax assets, long-term                     1,526        1,592
Other long-term assets                             2,477        2,750
--------------------------------------------  ------------------------
Total Assets                                  $   24,591   $   25,550
============================================  ========================

Liabilities and Equity

Short-term debt and current portion of
 long-term debt                               $    4,236   $    4,377
Accounts payable                                     898          839
Accrued compensation and benefits costs              532          481
Unearned income                                      251          257
Other current liabilities                          1,652        1,833
--------------------------------------------  ------------------------
  Total Current Liabilities                        7,569        7,787
Long-term debt                                     6,930        9,794
Pension liabilities                                1,058        1,307
Post-retirement medical benefits                   1,268        1,251
Liability to subsidiary trusts issuing
 preferred securities                              1,809        1,793
Other long-term liabilities                        1,176        1,144
--------------------------------------------  ------------------------
  Total Liabilities                               19,810       23,076

Minorities' interests in equity of
 subsidiaries                                        102           73
Preferred stock                                      499          550
Deferred ESOP benefits                                 -          (42)
Mandatory convertible preferred stock                889            -
Common stock, including additional paid-in
 capital                                           3,239        2,739
Retained earnings                                  1,315        1,025
Accumulated other comprehensive loss              (1,263)      (1,871)
--------------------------------------------  ------------------------
Total Liabilities and Equity                  $   24,591   $   25,550
============================================  ========================

    Shares of common stock issued and outstanding were (in thousands)
793,884 and 738,273 at December 31, 2003 and December 31, 2002
respectively.

(1) Amounts include reclassification for the effect of adoption of FIN
    46R as described herein.


                           Xerox Corporation
      Condensed Consolidated Statements of Cash Flows (Unaudited)

                                 Three Months Ended     Year Ended
                                    December 31,        December 31,
(in millions)                      2003     2002       2003     2002
-------------------------------  ------------------  -----------------

Cash Flows from Operating
 Activities
Net Income                        $  222   $   19     $  360   $   91
Adjustments required to
 reconcile net income to cash
 flows from operating
 activities:
   Provision for litigation          (61)       -        239        -
   Depreciation and amortization     182      263        748    1,035
   Impairment of goodwill              -        -          -       63
   Provisions for receivables
    and inventory                     49       93        302      468
   Restructuring and asset
    impairment charges               120      408        176      670
   (Gain) loss on early
    extinguishment of debt             -       (1)        73       (1)
   Net (gain) loss on sales of
    businesses, assets and
    affiliate's sale of stock         (1)      19         (1)      (1)
   (Undistributed) distributed
    equity in net income of
    unconsolidated affiliates         (4)       1        (37)     (23)
   Cash payments for
    restructurings                   (46)    (116)      (345)    (392)
   Contributions to pension
    benefit plans                    (16)      (9)      (672)    (138)
   Decrease (increase) in
    inventories                      127      (48)        62       16
   Increase in on-lease
    equipment                        (59)     (29)      (166)    (127)
   (Increase) decrease in
    finance receivables              (49)      98        496      754
   (Increase) decrease in accounts
    receivable and billed portion
    of finance receivables           (10)    (255)       164     (266)
   Increase in accounts payable
    and accrued compensation         221      196        414      330
   Net change in income tax
    assets and liabilities            90     (127)       (38)    (438)
   Increase (decrease) in other
    current and long-term
    liabilities                        1      (43)       (78)    (109)
   Early termination of
    derivative contracts             136       56        136       56
   Other, net                         69       74         46       (8)
                                 ------------------  -----------------
      Net cash provided by
       operating activities          971      599      1,879    1,980
                                 ------------------  -----------------

Cash Flows from Investing
 Activities
   Cost of additions to land,
    buildings and equipment          (71)     (37)      (197)    (146)
   Proceeds from sales of land,
    buildings and equipment            5        1         10       19
   Cost of additions to internal
    use software                     (19)     (20)       (53)     (50)
   Proceeds from divestitures,
    net                                6        -         35      340
   Acquisitions, net of cash
    acquired                           -       (4)         -       (4)
   Net change in escrow and
    other restricted investments     193       74        254      (63)
   Other, net                          -       (3)         -       (3)
                                 ------------------  -----------------
      Net cash provided by
       investing activities          114       11         49       93
                                 ------------------  -----------------

Cash Flows from Financing
 Activities
   Cash proceeds from new
    secured financings               841    1,031      2,450    3,055
   Debt payments on secured
    financings                      (604)    (413)    (2,181)  (1,662)
   Other cash changes in debt,
    net                           (1,194)    (606)    (4,044)  (4,619)
   Net proceeds from issuance of
    mandatory convertible
    preferred stock                    -        -        889        -
   Net proceeds from sales of
    common stock                       9        -        477        4
   Dividends on preferred stock      (25)     (67)       (57)     (67)
   Dividends to minority
    shareholders                      (1)      (1)        (4)      (3)
                                 ------------------  -----------------
      Net cash used in financing
       activities                   (974)     (56)    (2,470)  (3,292)
                                 ------------------  -----------------
Effect of exchange rate changes
 on cash and cash equivalents         96       52        132      116
                                 ------------------  -----------------

Increase (decrease) in cash and
 cash equivalents                    207      606       (410)  (1,103)
Cash and cash equivalents at
 beginning of period               2,270    2,281      2,887    3,990
                                 ------------------  -----------------
Cash and cash equivalents at end
 of period                        $2,477   $2,887     $2,477   $2,887
                                 ==================  =================



                           Xerox Corporation
                 Segment Revenues and Operating Profit

                                              Three Months Ended
                                                  December 31,
(in millions, except margins)                2003    2002    Change
--------------------------------------     ---------------------------

Revenues
   Production (a)                           $1,309  $1,264       4%
   Office (a)                                2,093   1,993       5%
   Developing Markets Operations (DMO)         441     435       1%
   Other                                       449     554    (19%)
                                           ------------------------
Total Revenues                              $4,292  $4,246       1%
                                           ------------------------

   Memo: Color (b)                          $  970  $  809      20%

Operating Profit
   Production (a)                           $  166  $  184  $  (18)
   Office (a)                                  242     208      34
   DMO                                          51      47       4
   Other                                       (50)    (79)     29
                                           ------------------------
Total Operating Profit                      $  409  $  360  $   49
                                           ========================

Operating Margin
   Production (a)                             12.7%   14.6%   (1.9)pts
   Office (a)                                 11.6%   10.4%    1.2 pts
   DMO                                        11.6%   10.8%    0.8 pts
   Other                                    (11.1%) (14.3%)    3.2 pts
                                           ---------------------------
Total Operating Margin                         9.5%    8.5%    1.0 pts
                                           ---------------------------

----------------------------------------------------------------------

Reconciliation to pre-tax income
   Segment Operating Profit                 $  409  $  360
   Reconciling item:
       Restructuring and asset impairment
        charges                               (120)   (408)
       Provision for litigation                 61       -
   Allocated item:
       Equity in net income of
        unconsolidated affiliates              (15)    (11)
                                           ----------------
   Pre-tax income                           $  335  $  (59)
                                           ================

(a) In 2003 we reclassified our mid-range color products (11-40 ppm)
    from the Production segment to the Office segment. As a result,
    annual 2002 revenue of $1,093 million was reclassified from the
    Production to the Office segment. The quarterly impact is as
    follows: Q1 02 - $237 million, Q2 02 - $259 million, Q3 02 - $259
    million, Q4 02 - $338 million. Operating profit was reclassified
    for this change as well as for certain changes in corporate and
    other expense allocations. The fourth quarter 2002 impact is to
    increase (decrease) segment operating profit as follows:
    Production - ($69) million; Office - $57 million; DMO - $8
    million; Other - $4 million. The full year impact is to increase
    (decrease) 2002 segment operating profit as follows: Production -
    ($175) million; Office - $123 million; DMO - $29 million; Other -
    $23 million.


   Production:   Monochrome 91+ pages per minute (ppm), Color 41+ ppm;
                  North America & Europe
   Office:       Monochrome up to 90 ppm; Color up to 40 ppm; North
                  America & Europe
   DMO:          Operations in Latin America, the Middle East, India,
                  Eurasia, Russia and Africa
   Other:        Paper, SOHO, Xerox Engineering Systems (XES), Xerox
                  Technology Enterprises (XTE), consulting, equity
                  income and non-allocated corporate items

(b) Color revenues represent a subset of total revenues.


Financial Review

Summary

                               Three Months Ended Dec. 31,
(in millions)                    2003       2002    Change
--------------------------- ---------- ---------- -----------

Equipment sales                $1,381     $1,247          11%
Post sale and other revenue     2,663      2,760         (4%)
Finance income                    248        239           4%
                            ---------- ----------
Total Revenues                 $4,292     $4,246           1%


Reconciliation to Condensed Consolidated Statements of Income

Sales                          $2,082     $1,914
Less: Supplies, paper and
 other sales                     (701)      (667)
                            ---------- ----------
Equipment Sales                $1,381     $1,247

Service, outsourcing and
 rentals                       $1,962     $2,093
Add: Supplies, paper and
 other sales                      701        667
                            ---------- ----------
Post sale and other revenue    $2,663     $2,760

Total fourth quarter 2003 revenues of $4.3 billion grew one percent from $4.2
billion in the 2002 fourth quarter including a 6-percentage point benefit from
currency. Equipment sales grew 11 percent in the fourth quarter 2003, including
a 7-percentage point benefit from currency. The remainder of the equipment sales
growth was driven by the success of our numerous recent digital office and
production product launches as well as growth in DMO. Post sale and other
revenue declined 4 percent primarily due to declines in older technology light
lens, DMO and the Small Office / Home Office (SOHO) business, which we
previously exited, as well as the absence of 2002 fourth quarter revenue of $50
million related to a third party licensing agreement. These declines were
partially offset by growth in our digital revenues and a 5-percentage point
benefit from currency. Post sale and other revenue declines reflect the
reduction in our equipment at customer locations and related page volume
declines. Finance income grew 4 percent, including a 6-percentage point benefit
from currency.

The fourth quarter 2003 net income of $222 million or $0.22 cents per diluted
share included an after-tax restructuring charge of $76 million ($120 million
pre-tax) and a $37 million ($61 million pre-tax) litigation provision reduction
following court approval to settle the pension-related Berger v. Retirement
Income Guarantee Plan (RIGP) litigation. The fourth quarter 2002 net income of
$19 million or $0.01 cent per diluted share included after-tax restructuring
charges of $280 million ($408 million pre-tax) and additional tax benefits of
$90 million arising from the favorable resolution of a foreign tax audit and a
foreign tax law change.

The calculations of basic and diluted earnings per share are enclosed as
appendix I.

Operations Review

Revenues for the three months ended December 31, 2003 and 2002 were as follows:

(in millions)                   Production Office   DMO  Other  Total
------------------------------- ---------- ------- ----- ----- -------

2003
  Equipment sales                    $446    $755  $137   $43  $1,381
  Post sale and other revenue         769   1,191   302   401   2,663
  Finance income                       94     147     2     5     248
                                ---------- ------- ----- ----- -------
  Total Revenue                    $1,309  $2,093  $441  $449  $4,292
                                ---------- ------- ----- ----- -------

2002
  Equipment sales                    $376    $685  $113   $73  $1,247
  Post sale and other revenue         794   1,165   319   482   2,760
  Finance income                       94     143     3    (1)    239
                                ---------- ------- ----- ----- -------
  Total Revenue                    $1,264  $1,993  $435  $554  $4,246
                                ---------- ------- ----- ----- -------

Equipment sales of $1,381 million in the fourth quarter 2003 increased 11
percent from $1,247 million in the fourth quarter 2002 including a 7-percentage
point benefit from currency and reflecting significant growth in production
color, light production and office color printing as well as developing markets
operations. Continued equipment sales growth reflects the success of numerous
new products launched during the last 2 years. Color equipment sales continue to
grow rapidly and now represent over 25 percent of total equipment sales. In the
fourth quarter 2003, approximately 60 percent of equipment sales were generated
from products launched in the previous two years.

Production: 2003 fourth quarter equipment sales grew 19 percent from the fourth
quarter 2002 as significant installation growth and favorable currency more than
offset price declines of approximately 5 percent. Very strong color equipment
sales growth reflected strong installation increases, including an increased
proportion of DocuColor 6060 and DocuColor iGen3 sales, which were partially
offset by price declines. Production monochrome equipment sales grew modestly as
very strong light-production installs, driven by the success of the recently
introduced Xerox 2101, more than offset modest production publishing declines.

Office: 2003 fourth quarter equipment sales increased 10 percent from the fourth
quarter 2002 as very strong installation growth was partially offset by
moderating price declines of approximately 5 to 10 percent and unfavorable mix.
Equipment installation growth of approximately 20 percent reflects growth in all
monochrome digital and color businesses, particularly office color printing and
our line of monochrome multifunction/copier systems, which include the
CopyCentre, WorkCentre and WorkCentre Pro, all of which were available for the
first full quarter. These products are intended to expand our market reach and
include new entry-level configurations at more competitive prices.

DMO: Equipment sales in the fourth quarter 2003 grew 21 percent, or $24 million,
from the 2002 fourth quarter reflecting volume growth and improved mix,
partially offset by price declines.

Post sale and other revenues of $2,663 million declined 4 percent from $2,760
million in the fourth quarter 2002, including a 5-percentage point benefit from
currency. These declines reflect the absence of the prior year $50 million third
party licensing revenue and lower equipment populations, as post sale revenue is
largely a function of the equipment placed at customer locations and the volume
of prints and copies that our customers make on that equipment as well as
associated services. Fourth quarter 2003 supplies, paper and other sales of $701
million (included within post sale and other revenue) grew by 5 percent from
2002, due primarily to favorable currency. Service, outsourcing and rental
revenue of $1,962 million declined 6 percent from the 2002 fourth quarter
including a 2 percentage-point decline due to the absence of the prior year $50
million licensing revenue. The remainder of the decline largely reflects lower
equipment populations and related page volumes, the impact of which was only
partially offset by favorable currency.

Production: 2003 fourth quarter post sale and other revenue declined 3 percent
as the impact of monochrome page volume declines, primarily in older technology
light lens products, more than offset the impact of favorable currency.

Office: 2003 fourth quarter post sale and other revenue grew 2 percent as strong
digital page growth and favorable currency more than offset declines in older
technology light lens products.

DMO: 2003 fourth quarter post sale and other revenue declined 5 percent due
largely to declines in rental revenue, which were only partially offset by
higher supplies and service revenue. Although declining, this represents a
significant sequential improvement due to the stabilization of equipment
populations in DMO, as evidenced by increasing equipment sales in recent
quarters.

Other: 2003 fourth quarter post sale and other revenue declined 17 percent from
the 2002 fourth quarter as declines in SOHO and XES as well as the absence of
the prior year $50 million licensing revenue more than offset the impact of
favorable currency.

Key Ratios and Expenses

                                       Q4           Q4
                                      2003         2002
                                    -----------------------
Gross Margin
   Sales                               36.8  %     38.6   %
   Service, outsourcing and rentals    45.7        47.3
   Financing                           64.5        57.7
   Total                               42.5        43.9

R&D % revenue                           4.7         5.1
SAG % revenue                          25.9        26.7

Fourth quarter 2003 total gross margin of 42.5 percent decreased 1.4 percentage
points from 43.9 percent in the fourth quarter 2002. The absence of the 2002
fourth quarter $50 million licensing revenue represents 0.7 percentage points of
the decline. In addition, beginning in the third quarter 2003, we completed the
R&D phase of the DocuColor iGen3 development and therefore are including ongoing
engineering costs, associated with its initial commercial production, in cost of
sales. These costs represented 0.3 percentage points of the fourth quarter 2003
total gross margin decline. 

In the fourth quarter 2003 improved manufacturing and service
productivity largely offset lower prices, unfavorable mix and higher
pension and other employee benefit expenses. Fourth quarter 2003 sales
gross margin declined 1.8 percentage points from the fourth quarter
2002. About half of the decline is due to DocuColor iGen3 ongoing
engineering costs, with the remainder due to price investments and
weaker mix as we increased our penetration of the digital light
production market. These adverse impacts were only partially offset by
improved productivity. Service, outsourcing and rentals margin
declined 1.6 percentage points from the fourth quarter 2002 with 1.3
percentage points of the decline due to the absence of the $50 million
prior year licensing revenue. Fourth quarter 2003 finance income gross
margin of 64.5 percent increased 6.8 percentage points from the 2002
fourth quarter, in line with declining interest costs specific to
equipment financing.

Research and development (R&D) expense of $200 million was $18 million less than
the fourth quarter 2002, primarily related to the commercial launch of the
DocuColor iGen3 and improved R&D productivity, partially offset by higher
pension and other employee benefit expenses. We continue to invest in
technological development, particularly in color, and believe that our R&D
spending is at an adequate level to remain technologically competitive. Xerox
R&D remains strategically coordinated with that of Fuji Xerox.

Selling, administrative and general (SAG) expenses of $1,112 million in the 2003
fourth quarter declined by $23 million from the 2002 fourth quarter. Fourth
quarter 2003 bad debt expense of $41 million decreased by $33 million from the
fourth quarter 2002, due to improved collections performance, receivables aging
and write-off trends. Fourth quarter 2002 SAG expense also included internal use
software write-offs of $26 million. These items combined with increased
productivity, more than offset higher pension and other employee benefit
expenses and a $47 million adverse currency impact.

In the fourth quarter 2003, we recorded restructuring and asset impairment
charges of $120 million, primarily consisting of new severance actions and
pension settlements related to previous employee restructuring actions. The
remaining restructuring reserve balance at December 31, 2003 for all
restructuring programs was $221 million.

Worldwide employment of 61,100 declined by 1,700 from the 2003 third quarter due
to reductions attributable to our restructuring programs and attrition.

Other expenses, net for the three months ended December 31, 2003 and 2002 were
as follows:

(in millions)                                      2003      2002
---------------------------------------------- --------- ---------

Non-financing interest expense                     $101      $136
Interest income                                     (26)      (13)
Loss (gain) on sales of businesses and assets        (1)       19
Currency losses, net                                 19         8
Amortization of intangible assets                     9         9
All other, net                                       14         4
                                               --------- ---------
    Total                                          $116      $163
                                               ========= =========

Fourth quarter 2003 non-financing interest expense was $35 million lower than
the 2002 fourth quarter primarily due to lower average debt balances. Fourth
quarter 2003 non-financing interest expense also included a $6 million benefit
from the reversal of interest related to the Berger litigation, which had been
accrued in the second and third quarters of 2003.

Fourth quarter 2003 interest income increased by $13 million compared to the
fourth quarter 2002, reflecting $13 million of interest income related to
Brazilian tax credits that became realizable in the fourth quarter 2003.

The fourth quarter 2002 loss on sales of businesses and assets primarily related
to a loss on the sale of our Italian leasing business resulting from sale
contingency adjustments.

In the fourth quarter 2003 we recorded income tax expense of $123 million
compared with an income tax benefit of $72 million in the fourth quarter 2002.
The fourth quarter 2003 income tax expense reflects benefits of $22 million
arising from the reversal of valuation allowances on deferred tax assets
following a re-evaluation of their future realization due to improved financial
performance in certain foreign jurisdictions. The fourth quarter 2002 income tax
benefit reflects benefits of $79 million from the favorable resolution of a
foreign tax audit and $11 million arising from a foreign tax law change. The
effective tax rate for the fourth quarter 2003 and 2002 was 36.7 percent and
122.0 percent, respectively. The effective tax rate for the full year 2003 and
2002 was 30.3 percent and 3.7 percent, respectively.

Our effective tax rate will change based on nonrecurring events as well as
recurring factors including the geographical mix of income before taxes and the
related tax rates in those jurisdictions. We anticipate that our 2004 annual
effective tax rate will approximate 40 percent.

Equity in net income of unconsolidated affiliates primarily consists of our 25
percent share of Fuji Xerox income.

Capital Resources and Liquidity

Cash Flow Analysis

The following table summarizes our cash flows for the three months ended
December 31, 2003 and 2002 as reported in our Condensed Consolidated Statements
of Cash Flows:

                                                Three Months Ended
                                                   December 31,
                                               --------------------
(in millions)                                      2003       2002
---------------------------------------------- --------- ----------

Operating Cash Flows                               $971       $599
Investing Cash Flows                                114         11
Financing Cash Usage                               (974)       (56)
Effect of exchange rate changes                      96         52
                                               --------- ----------
Increase in cash and cash equivalents               207        606
Cash and cash equivalents at beginning of
 period                                           2,270      2,281
                                               --------- ----------
Cash and cash equivalents at end of period       $2,477     $2,887
                                               ========= ==========

Fourth quarter 2003 cash flows from operating activities were $971 million and
reflect pre-tax income of $335 million and the following non-cash items:
depreciation and amortization of $182 million, provisions for receivables and
inventory of $49 million, and the pension litigation adjustment of ($61)
million. In addition, lower inventories resulting from improved inventory
turnover and solid year over year equipment sales growth in the seasonally
strong fourth quarter generated $127 million of operating cash flow. Increases
in accounts payable and accrued compensation of $221 million and cash proceeds
from the early termination of certain interest rate swaps of $136 million also
contributed positively to our operating cash flow. The 2003 fourth quarter
operating cash flow is $372 million higher than the 2002 fourth quarter,
primarily due to improvements in receivables and inventory of $273 million and
lower restructuring payments of $70 million. The fourth quarter 2002 included
the impact of terminating our $230 million U.S. accounts receivable
securitization.

Cash flows from investing activities for the three months ended December 31,
2003 primarily consisted of $205 million released from restricted cash related
to former reinsurance obligations associated with our discontinued operations,
partially offset by capital expenditures and internal use software spending. The
2002 fourth quarter included $74 million released from restricted cash related
to funds that supported our interest rate swap portfolio, partially offset by
capital and internal use software spending.

Cash flows from financing activities for the three months ended December 31,
2003 primarily consisted of scheduled payments on term and other debt of $1.2
billion, net proceeds on secured borrowings with GE and other vendor financing
partners of $237 million and dividends on our preferred stock of $25 million.
Financing activities for the fourth quarter 2002 primarily consisted of net
proceeds from secured borrowing activity of $618 million offset by $606 million
of net payments of other maturing debt and $67 million of dividends on our
preferred stock.

Financing Activity

During the fourth quarter 2003 we originated loans, secured by finance
receivables, generating cash proceeds of $841 million and repaid loans, secured
by finance receivables, of $604 million. The proportion of total finance
receivables that are secured is 59 percent, an increase of 5 percent over the
third quarter 2003. The increase resulted, in part, from additional vendor
financing transactions in the U.S. and several European countries. As of
December 31, 2003, debt secured by finance receivables represented approximately
39 percent of total debt.

The following table compares finance receivables to financing related debt as of
December 31, 2003:

(in millions)                                     Finance     Debt(2)
                                                 Receivables
-------------------------------------------- -------------------------

Finance Receivables Encumbered by Loans(1) :
     GE Loans - U.S. and Canada                    $3,467      $3,038
     Merrill Lynch Loan - France                      567         456
     GE Loans - Germany                               114          84
     GE Loans - U.K.                                  719         570
     Other Europe                                     335         277
                                             ------------- -----------
Total - Finance Receivable Securitizations         $5,202      $4,425
                                                           ===========
Unencumbered Finance Receivables                   $3,611
                                             -------------
Total Finance Receivables(3)                       $8,813
                                             =============


(1) Encumbered Finance receivables represent the net book value of
    finance receivables that secure each of the indicated loans.

(2) Represents the debt secured by finance receivables, including
    transactions utilizing special purpose/variable interest entities

(3) Includes (i) Billed portion of finance receivables, net (ii)
    Finance receivables, net and (iii) Finance receivables due after
    one year, net as included in the condensed consolidated balance
    sheets as of December 31, 2003.

Debt

Our debt maturities for 2004 and 2005 by quarter, and 2006, 2007, 2008 by year
and thereafter are as follows:

(in millions)      2004     2005     2006    2007     2008  Thereafter
                -------- -------- -------- -------  ------- ----------

First Quarter    $1,081     $476
Second Quarter    1,087    1,240
Third Quarter       686      223
Fourth Quarter    1,382      190
                -------- -------- -------- -------  ------- ----------
Full Year        $4,236   $2,129     $486    $775     $782     $2,758
                ======== ======== ======== =======  ======= ==========

Debt secured by finance receivables (subset
 of above)

                 $2,028   $1,064     $461    $468     $404         $-

Recent Events

Berger v. RIGP 

In the first quarter 2003, we recorded a $300 million litigation
provision relating to the Berger v. RIGP litigation. In November 2003
RIGP reached an agreement in principle to settle the litigation and in
January 2004 received preliminary court approval to proceed with
settlement of this pension-related litigation for $239 million. As a
result, and based on the best available information related to final
expected settlement contingencies, we reversed $61 million of the
previously recorded provision in the fourth quarter 2003. The final
settlement could result in adjustments to this amount, however, at
this time we do not expect any material changes.

Adoption of New Accounting Standards 

As of July 1, 2003, we adopted both Statement of Financial Accounting
Standards No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS 150") and FASB
Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46"). In December 2003, the FASB published a revision to FIN 46,
in part, to clarify certain of its provisions. As a result of this
revision to FIN 46, we are now required to deconsolidate all three of
our subsidiary trusts (Capital Trust I, Capital Trust II and Capital
LLC), two of which issued the securities previously reclassified in
accordance with the adoption of SFAS 150.

The revision to FIN 46 addressed ownership provisions related to consolidation.
This guidance resulted in the holders of the preferred securities being
considered the primary beneficiaries of these trusts. As such, we are no longer
permitted to consolidate these entities. We have therefore deconsolidated the
three trusts and reflected our obligations to them within the balance sheet
liability caption "Liability to subsidiary trusts issuing preferred securities."
In addition to deconsolidating these subsidiary trusts, the interest on these
loans, which was previously reported net of tax as a component of "Minorities'
interests in earnings of subsidiaries" in our Condensed Consolidated Statements
of Income, are now accounted for as interest expense within "Other expenses,
net", with the tax effects presented within "Income taxes (benefits)".
Accordingly, $36 million in interest expense on loans payable to the subsidiary
trusts is included in non-financing interest expense for the fourth quarters of
2003 and 2002. The adoption of this interpretation had no impact on net income
or earnings per share.

S-3 Shelf Registration 

On December 30, 2003 we filed a $2.5 billion universal shelf
registration statement with the SEC as part of our strategy to
maintain financial flexibility. The shelf registration statement
covers a variety of securities including debt and equity securities,
all as described in the shelf registration statement. This shelf
registration statement has not yet been declared effective by the SEC.

Pensions 

During 2003 the value of the assets held by our pension plans
increased significantly reflecting improved market performance and
significant pension plan contributions. These impacts more than offset
the adverse impact of lower discount rates worldwide, which have the
effect of increasing our pension obligations. As a result of the
increased value of our pension plan assets and the net reduction in
the under-funded status of our pension obligations, we recorded a
fourth quarter non-cash and non-income statement credit of $134
million directly to shareholders' equity to reduce the minimum pension
liability recorded in the prior year.

We have reduced the discount rate for our worldwide pension plans by 25 to 50
basis points for the valuation of the December 31, 2003 obligations and for the
determination of 2004 expense. Due to the impact of these new assumptions and
net of the positive effects of the accelerated funding during 2003, pension
expense in 2004 is expected to increase by approximately $65 million versus
2003. However, we do not anticipate any required cash contributions for our
significant worldwide pension plans during 2004 as a result of the improved
market performance and the accelerated funding during 2003.

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
our Third Quarter 2003 Form 10-Q filed with the SEC. We do not intend
to update these forward-looking statements.

                              APPENDIX I

                           Xerox Corporation
                      Net Income per Common Share

                                 Three Months Ended     Year Ended
                                    December 31,       December 31,
($ millions, except per share
 data; shares in thousands)           2003     2002     2003     2002
                                 ------------------- -----------------

I. BASIC EARNINGS PER COMMON
 SHARE:

Income before cumulative effect
 of accounting principle              $222      $19     $360     $154
Accrued dividends on:
     Series C Mandatory
      Convertible Preferred
      Stock                            (15)       -      (30)       -
     ESOP Preferred Stock, net         (10)     (10)     (41)     (73)
                                 ---------- -------- -------- --------
Adjusted income before
 cumulative effect                     197        9      289       81
 of accounting change
Cumulative effect of accounting
 change                                  -        -        -      (63)
                                 ---------- -------- -------- --------
Net income available to common
 shareholders                         $197       $9     $289      $18
                                 ========== ======== ======== ========

Weighted Average Common Shares
 Outstanding                       794,278  737,298  769,032  731,280
                                 ---------- -------- -------- --------

Basic Earnings per share:
Before cumulative effect of
 accounting principle                $0.25    $0.01    $0.38    $0.11
Cumulative effect of accounting
 principle                               -        -        -    (0.09)
                                 ---------- -------- -------- --------
    Basic Earnings per Share         $0.25    $0.01    $0.38    $0.02
                                 ========== ======== ======== ========





II. DILUTED EARNINGS PER COMMON
    SHARE:

Income before cumulative effect
 of accounting principle              $222      $19     $360     $154
ESOP expense adjustment, net            (4)     (10)     (35)     (73)
Accrued dividends on Series C
 Mandatory Convertible Preferred
 Stock                                   -        -      (30)       -
Interest on convertible
 securities, net                        14        -        -        -
                                 ---------- -------- -------- --------
Adjusted income before
 cumulative effect of accounting
 principle                             232        9      295       81
Cumulative effect of accounting
 principle                               -        -        -      (63)
                                 ---------- -------- -------- --------
Adjusted net income available to
 common shareholders                  $232       $9     $295      $18
                                 ========== ======== ======== ========



Weighted Average Common Shares
 Outstanding                       794,278  737,298  769,032  731,280
Common shares issuable with
 respect to:
     Stock options                  11,131    4,495    8,273    5,401
     Convertible securities        115,417        -        -        -
     Series C Mandatory
      Convertible Preferred
      Stock                         80,420        -        -        -
     ESOP Preferred Stock           44,061   77,867   51,082   70,463

                                 ---------- -------- -------- --------
Adjusted Weighted Average Shares
 Outstanding                     1,045,307  819,660  828,387  807,144
                                 ========== ======== ======== ========

Diluted Earnings per share:
Before cumulative effect of
 accounting principle                $0.22    $0.01    $0.36    $0.10
Cumulative effect of accounting
 principle                               -        -        -    (0.08)
                                 ---------- -------- -------- --------
    Diluted Earnings per Share       $0.22    $0.01    $0.36    $0.02
                                 ========== ======== ======== ========

Cynthia B. Johnston                                                                   
Director, Investor Relations                                                          
(203) 968-3489                                                                        
Cindy.Johnston@usa.xerox.com                                                          
Fax (203) 968-3944                                                                    
or
Darlene Caldarelli              
Manager, Investor Relations     
(203) 968-3807                  
Darlene.Caldarelli@usa.xerox.com
Fax (203) 968-3944