BW20030728002048  20030728T110039Z UTC


( BW)(XEROX-CORP.)(XRX) Interim Results

    Business Editors
    UK REGULATORY NEWS

    STAMFORD, Conn.--(BUSINESS WIRE)--July 28, 2003--

                Xerox Reports Second-Quarter Earnings;
            New Digital Products Fuel Equipment Sale Growth

"From significantly strengthening our balance sheet to driving revenue
improvement in key businesses, Xerox is delivering on all fronts."

-- Earnings per share of 9 cents includes 5-cent charge for 2002
credit facility fees

-- Equipment sale growth of 8 percent

-- Total revenue of $3.9 billion

-- Operating cash flow of $682 million

-- Worldwide cash balance of $2.3 billion; debt reduction of $2.5
billion

Xerox Corporation (NYSE: XRX) reported today second-quarter earnings
of 9 cents per share including a 5 cent previously announced charge
for the remaining unamortized fees associated with its terminated 2002
credit facility. Excluding this non-cash charge, the company's results
exceeded expectations due to continued equipment sales improvements
and disciplined cost management.

"Equipment sales growth is a leading indicator of the company's strong
presence in the marketplace and a driver for future post-sale
revenue," said Anne M. Mulcahy, Xerox chairman and chief executive
officer. "That's why Xerox has remained focused on building and
refreshing its product line with competitive offerings in the growing
digital and color markets. These investments are clearly paying off."

Equipment sales grew 8 percent in the second quarter including a 7
percentage point currency benefit. Total revenue for the second
quarter was $3.9 billion, a decline of 1 percent from the second
quarter of 2002 including a 6 percentage point currency benefit. The
decrease is primarily driven by declining post-sale revenue from both
the company's older light lens technology as well as moderating
declines in its developing markets business. Xerox noted that
improving trends in its developing markets operations continue, with
DMO equipment sales growing 39 percent year over year.

"Total revenue from the company's targeted growth areas - office
digital, production digital and value-added services - grew 10 percent
in the quarter and now represents about 70 percent of the company's
revenue," added Mulcahy. "These results are directly aligned with our
growth strategy. We're transforming Xerox into the industry's leading
digital player with black-and-white and color digital systems that are
integrated with a robust portfolio of services, delivering
productivity improvements for our customers through lower cost, higher
quality document management."

As more businesses small to large recognize the advantages of adding
color to their documents, Xerox continues to yield strong revenue
results from its technology in the production color and office color
markets. Total color revenue was up 19 percent in the second quarter
largely due to the success of Xerox's DocuColor series.

The company also said that second-quarter equipment installation rates
grew in key growth markets, evidence of the strong momentum from the
26 new products launched in the past 18 months. For example,
production color installs grew 7 percent in the second quarter led by
increased demand for the Xerox DocuColor 6060 Digital Color Press.

In the office, color multifunction installs increased 64 percent and
black-and-white multifunction grew 8 percent primarily driven by sales
of the Xerox Document Centre 500 Series announced last year. The
company is also seeing the initial benefits from its new and enhanced
office products launched in the second quarter. The new suite of
CopyCentre, WorkCentre, and WorkCentre Pro offerings has speeds
ranging from 16 to 90 pages per minute and prices starting as low as
$899, reflecting the most competitive pricing for the office in
Xerox's history.

Gross margins of 42.4 percent continue to reflect operational
efficiencies. Selling, administrative and general costs declined 2
percent including an adverse impact from currency of 4 percentage
points.

Xerox reported second-quarter operating cash flow of $682 million and
its worldwide cash position was $2.3 billion as of June 30. Debt
decreased $2.5 billion in the quarter due to the company's successful
completion last month of its $3.6 billion recapitalization plan. The
recapitalization included $1.34 billion of new equity, $1.25 billion
of senior unsecured notes, and a new $1 billion credit facility.

"From significantly strengthening our balance sheet to driving revenue
improvement in key businesses, Xerox is delivering on all fronts,"
said Mulcahy. "Despite economic uncertainty, we are well positioned to
compete aggressively and continue strengthening our business through
improved year-over-year equipment sale trends and increased revenue in
important growth markets, yielding strong results for the full year."

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 March 31, 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)


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

(in millions, except                    %                         % 
   per share data)    2003    2002   Change    2003    2002    Change
------------------- ------- ------- -------- ------- ------- ---------

Revenues
   Sales            $1,696  $1,662        2% $3,285  $3,245         1%
   Service,
    outsourcing and
    rentals          1,970   2,040      (3%)  3,887   4,051       (4%)
   Finance income      254     250        2%    505     514       (2%)
                    ------- -------          ------- -------
Total Revenues       3,920   3,952      (1%)  7,677   7,810       (2%)

Costs and Expenses
   Cost of sales     1,069   1,017        5%  2,070   2,038         2%
   Cost of service,
    outsourcing and
    rentals          1,096   1,154      (5%)  2,185   2,317       (6%)
   Equipment
    financing
    interest            93     101      (8%)    185     193       (4%)
   Research and
    development
    expenses           225     240      (6%)    461     470       (2%)
   Selling,
    administrative
    and general
    expenses         1,089   1,110      (2%)  2,109   2,279       (7%)
   Restructuring
    and asset
    impairment
    charges             37      53     (30%)     45     199      (77%)
   Provision for                                               
    litigation           -       -      (a)     300       -       (a)
   Gain on                                                     
    affiliate's
    sale of stock       (1)      -      (a)      (1)      -       (a)
   Other expenses,
    net                166     116       43%    287     214       34%
------------------- ------- -------          ------- -------
Total Costs and
 Expenses            3,774   3,791      (0%)  7,641   7,710       (1%)
------------------- ------- -------          ------- -------

Income before
 Income Taxes,
 Equity Income,
   Minorities'
    Interests and
    Cumulative
    Effect
    of Change in
     Accounting
     Principle (b)     146     161      (9%)     36     100      (64%)
   Income taxes         53      64     (17%)      -      41       (a)
------------------- ------- -------          ------- -------

Income before
 Equity Income,
 Minorities'
 Interests
   and Cumulative
   Effect of
   Change in
   Accounting
   Principle            93      97      (4%)     36      59      (39%)
   Equity in net
    income of
    unconsolidated
    affiliates          16      15        7%     30      26       15%
   Minorities'
    interests in
    earnings of
    subsidiaries       (23)    (25)       8%    (45)    (49)        8%
------------------- ------- -------          ------- -------

Income before
 Cumulative Effect
 of Change in
   Accounting
    Principle           86      87      (1%)     21      36      (42%)
   Cumulative                                                  
    effect of
    change in
    accounting
    principle            -       -      (a)       -     (63)      (a)
------------------- ------- -------          ------- -------

Net Income (Loss)      $86     $87      (1%)    $21    $(27)      178%
   Less: Preferred                                              
    stock
    dividends, net     (11)      -      (a)     (21)      -       (a)
------------------- ------- -------          ------- -------
Income (Loss)
 Available to
   Common                                                        
   Shareholders        $75     $87     (14%)     $-    $(27)     (a)
=================== ======= =======          ======= =======

Basic Earnings
 (Loss) per share:
   Income before
    Cumulative
    Effect of
    Change
    in Accounting                                                 
    Principle        $0.10   $0.12     (17%)  $0.00   $0.05      (a)
        Cumulative     
         effect of
         change in
         accounting
         principle       -       -      (a)       -   (0.09)     (a)
                    ------- -------          ------- -------
   Net Income                                                    
    (Loss) Per
    Share            $0.10   $0.12     (17%)  $0.00  $(0.04)     (a)
=================== ======= =======          ======= =======

Diluted Earnings
 (Loss) per share:
   Income before
    Cumulative
    Effect of
    Change
    in Accounting                                                 
    Principle        $0.09   $0.11     (18%)  $0.00   $0.05     (a)
        Cumulative                     
         effect of
         change in
         accounting
         principle       -       -      (a)       -   (0.09)    (a)
                    ------- -------          ------- -------
   Net Income                                                   
    (Loss) Per
    Share            $0.09   $0.11     (18%)  $0.00  $(0.04)    (a)
=================== ======= =======          ======= =======

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

(a)  Percent not meaningful

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


                           Xerox Corporation
           Condensed Consolidated Balance Sheets (Unaudited)

                                                        June  December
                                                         30,      31,
(in millions)                                           2003     2002
------------------------------------------------------------- --------
Assets

Cash and cash equivalents                             $2,279   $2,887
Accounts receivable, net                               2,149    2,072
Billed portion of finance receivables, net               491      564
Finance receivables, net                               2,993    3,088
Inventories                                            1,232    1,231
Other current assets                                   1,297    1,186
---------------------------------------------------- -------- --------
  Total Current Assets                                10,441   11,028
Finance receivables due after one year, net            5,265    5,353
Equipment on operating leases, net                       391      450
Land, buildings and equipment, net                     1,771    1,757
Investments in affiliates, at equity                     548      628
Intangible assets, net                                   342      360
Goodwill                                               1,609    1,564
Deferred tax assets, long-term                         1,610    1,592
Other long-term assets                                 2,572    2,726
---------------------------------------------------- -------- --------
Total Assets                                         $24,549  $25,458
==================================================== ======== ========

Liabilities and Equity

Short-term debt and current portion of
  long-term debt                                      $3,870   $4,377
Accounts payable                                         767      839
Accrued compensation and benefits costs                  428      481
Unearned income                                          243      257
Other current liabilities                              1,502    1,833
---------------------------------------------------- -------- --------
  Total Current Liabilities                            6,810    7,787
Long-term debt                                         7,928    9,794
Pension liabilities                                    1,723    1,307
Post-retirement medical benefits                       1,265    1,251
Other long-term liabilities                            1,162    1,144
---------------------------------------------------- -------- --------
  Total  Liabilities                                  18,888   21,283

Minorities' interests in equity of subsidiaries           71       73
Company-obligated, mandatorily redeemable
   preferred securities of subsidiary trusts holding
   solely subordinated debentures of the Company       1,716    1,701
Preferred stock                                          521      550
Deferred ESOP benefits                                   (42)     (42)
Mandatory convertible preferred stock                    889        -
Common stock, including additional paid in capital     3,229    2,739
Retained earnings                                      1,025    1,025
Accumulated other comprehensive loss                  (1,748)  (1,871)
---------------------------------------------------- -------- --------
Total Liabilities and Equity                         $24,549  $25,458
==================================================== ======== ========

Shares of common stock issued and outstanding were (in thousands)
789,665 and 738,273 at June 30, 2003 and December 31, 2002
respectively.


                           Xerox Corporation
      Condensed Consolidated Statements of Cash Flows (Unaudited)

                                        Three Months     Six Months
                                       Ended June 30,  Ended June 30,
                                       --------------- ---------------
(in millions)                            2003    2002    2003    2002
-------------------------------------- ------- ------- ------- -------

Cash Flows from Operating Activities
Net income (Loss)                         $86     $87     $21    $(27)
Adjustments required to reconcile net 
 income (loss) to cash flows from 
 operating activities:
   Provision for litigation                 -       -     300       -
   Depreciation and amortization          189     240     388     559
   Impairment of goodwill                   -       -       -      63
   Provisions for receivables and
    inventory                              98     108     173     257
   Restructuring and asset impairment
    charges                                37      53      45     199
   Loss on early extinguishment of
    debt                                   73       -      73       -
   Loss (gains) on sales of businesses
    and assets, net                         6      13       8      (6)
   Cash payments for restructurings       (73)    (61)   (253)   (183)
   Undistributed equity in income of
    affiliated companies                   (7)    (15)    (20)    (26)
   Decrease (increase) in inventories      17      24      17      81
   Increase in on-lease equipment         (36)    (55)    (72)    (91)
   Decrease in finance receivables        162     352     345     468
   Decrease (increase) in accounts 
    receivable and billed portion of
    finance receivables                   100    (101)     75    (102)
   Increase (decrease) in accounts 
    payable and accrued compensation 
    and benefit costs                      89      62     (44)    130
   Net change in all income tax assets
    and liabilities                       (35)     72    (113)   (325)
   Decrease in other current and long-
    term liabilities                      (45)    (53)   (106)   (143)
   Other, net                              21    (102)      4     (87)
                                       ------- ------- ------- -------
      Net cash provided by operating
       activities                         682     624     841     767
                                       ------- ------- ------- -------

Cash Flows from Investing Activities
   Cost of additions to land, buildings
    and equipment                         (44)    (45)    (79)    (71)
   Proceeds from sales of land,
    buildings and equipment                 3       1       4       4
   Cost of additions to internal use
    software                              (14)     (3)    (24)    (14)
   Proceeds from divestitures, net         26     228      29     273
   Net change in escrow and other
    restricted investments                 19     (75)    (34)   (153)
                                       ------- ------- ------- -------
      Net cash (used in) provided by
       investing activities               (10)    106    (104)     39
                                       ------- ------- ------- -------

Cash Flows from Financing Activities
   Cash proceeds from new secured
    financings                            329     667   1,142   1,178
   Debt payments on secured financings   (516)   (407)   (975)   (805)
   Other cash changes in debt, net     (2,598) (3,911) (2,856) (3,322)
   Proceeds from issuance of mandatory
    convertible
     preferred securities, net of
      issuance costs                      889       -     889       -
   Proceeds from sales of common stock,
    net of issuance costs                 457       2     460       4
   Dividends on preferred stock           (11)      -     (22)      -
   Dividends to minority shareholders      (1)      -      (1)      -
                                       ------- ------- ------- -------
      Net Cash Used In Financing
       Activities                      (1,451) (3,649) (1,363) (2,945)
                                       ------- ------- ------- -------
Effect of exchange rate changes on 
 cash and cash equivalents                 23      63      18      40
                                       ------- ------- ------- -------

Decrease in cash and cash equivalents    (756) (2,856)   (608) (2,099)
Cash and cash equivalents at beginning
 of period                              3,035   4,747   2,887   3,990
                                       ------- ------- ------- -------
Cash and cash equivalents at end of
 period                                $2,279  $1,891  $2,279  $1,891
                                       ------- ------- ------- -------

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



                           Xerox Corporation
                 Segment Revenues and Operating Profit

                                           Three Months Ended June 30,
(in millions, except margins)                 2003    2002    Change
-------------------------------------------- ------- ------- ---------
Revenues
     Production(a)                           $1,116  $1,113      0%
     Office(a)                                1,938   1,866      4%
     Developing Markets (DMO)                   410     462   (11%)
     Other(b)                                   456     511   (11%)
                                             ------- ------- ------
Total Revenues                               $3,920  $3,952    (1%)
                                             ------- ------- ------

     Memo: Color                               $814    $686     19%

Operating Profit
     Production(a)                             $113     $97    $16
     Office(a)                                  160     152      8
     DMO                                         48      14     34
     Other(b)                                  (122)    (33)   (89)
                                             ------- ------- ------
Total Operating Profit                         $199    $230   $(31)
                                             ======= ======= ======

Operating Margin
     Production(a)                             10.1%    8.7%   1.4 pts
     Office(a)                                  8.3%    8.1%   0.2 pts
     DMO                                       11.7%    3.0%   8.7 pts
     Other(b)                                (26.8%)  (6.5%) (20.3)pts
                                             ------- ------- ---------
Total Operating Margin                          5.1%    5.8%  (0.7)pts
                                             ------- ------- ---------
----------------------------------------------------------------------
Reconciliation to pre-tax income
     Segment Operating Profit                  $199    $230
     Reconciling items:
          Restructuring and asset impairment
           charges                              (37)    (53)
          Restructuring related inventory
           charge                                 -      (1)
     Allocated item:
          Equity in net income of
           unconsolidated affiliates            (16)    (15)
                                             ------- -------
     Pre-tax income                            $146    $161
                                             ======= =======



(a) In 2003 we reclassified our mid-range color products (11-40 ppm)
    from the Production segment to the Office segment. As a result,
    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 second quarter 2002 impact is to
    increase / (decrease) segment operating profit as follows:
    Production - ($29) million; Office - $14 million; DMO - $7
    million; Other - $8 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.

(b) Small Office / Home Office (SOHO) is now reported in Other as it
    no longer meets the thresholds for separate reporting.

     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

Financial Review

Summary

                                           Three Months Ended June 30,
            (in millions)                        2003    2002  Change
            ---------------------------------- ------- ------- -------
            Equipment sales                    $1,023    $948       8%
            Post sale and other revenue         2,643   2,754     (4%)
            Finance income                        254     250       2%
                                               ------- -------
            Total Revenues                     $3,920  $3,952     (1%)

            Reconciliation to Condensed Consolidated Statements of
             Income
            Sales                              $1,696  $1,662
            Less: Supplies, paper and other
             sales                               (673)   (714)
                                               ------- -------
            Equipment Sales                    $1,023    $948

            Service, outsourcing and rentals   $1,970  $2,040
            Add: Supplies, paper and other
             sales                                673     714
                                               ------- -------
            Post sale and other revenue        $2,643  $2,754


Total second quarter 2003 revenues of $3.9 billion declined 1 percent
from $4.0 billion in the 2002 second quarter including a 6-percentage
point benefit from currency. Despite continued economic weakness,
equipment sales grew 8 percent including a 7-percentage point benefit
from currency. Equipment sales growth primarily reflects the success
of our color multifunction products, growth in DMO and growth in
digital production. Post sale and other revenue declined 4 percent due
to declines in older technology light lens, DMO and Small Office /
Home Office (SOHO) revenue, which were only partially offset by a
5-percentage point benefit from currency. These declines reflect the
reduction in the number of these machines at customer locations and
related page volume declines. Finance income grew 2 percent, including
a 5-percentage point benefit from currency. Finance income continues
to reflect reduced equipment sales from prior quarters as well as the
2002 sale of our financing business in Italy.

                                           Three Months Ended June 30,
                                                 2003    2002  Change
                                               ------- ------- -------

            Net income (in millions)              $86     $87     $(1)
            Diluted earnings per share          $0.09   $0.11  $(0.02)

The second quarter 2003 net income of $86 million or $0.09 cents per
diluted share included a $45 million after-tax loss ($73 million
pre-tax) on the early extinguishment of debt related to the write-off
of the remaining unamortized fees associated with the terminated 2002
Credit Facility as well as after-tax restructuring charges of $23
million ($37 million pre-tax). Our underlying financial results
reflect the effective implementation of previous expense actions,
which have reduced selling, administrative and general (SAG) expenses.
The second quarter 2002 net income of $87 million or $0.11 cents per
diluted share, included after-tax restructuring charges of $41 million
($53 million pre-tax). Second quarter 2003 net income included gains
from remeasurement of foreign currency balances which were hedged with
option contracts while second quarter 2002 net income included losses
from unhedged currency positions. Such amounts are included as a
component of Other expenses, net in the Condensed Consolidated
Statements of Income. The weighted average common shares outstanding
on a diluted basis during the second quarters of 2003 and 2002 were
808 million and 913 million, respectively.

Operations Review

Revenues for the three months ended June 30, 2003 and 2002 were as
follows:

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

       2003
       Equipment Sales               $289    $594  $100   $40  $1,023
       Post Sale and Other            730   1,193   308   412   2,643
       Finance Income                  97     151     2     4     254
                                ---------- ------- ----- ----- -------
       Total Revenue               $1,116  $1,938  $410  $456  $3,920
                                ---------- ------- ----- ----- -------

       2002
       Equipment Sales               $260    $561   $72   $55    $948
       Post Sale and Other            755   1,156   387   456   2,754
       Finance Income                  98     149     3     -     250
                                ---------- ------- ----- ----- -------
       Total Revenue               $1,113  $1,866  $462  $511  $3,952
                                ---------- ------- ----- ----- -------

Equipment sales of $1,023 million in the second quarter 2003 increased
8 percent from $948 million in the second quarter 2002, reflecting the
success of numerous recent product launches and a 7-percentage point
benefit from currency. In the second quarter 2003, approximately 50
percent of equipment sales revenue was generated from products
launched in the previous two years.

Production: 2003 second quarter equipment sales grew 11 percent from
the second quarter 2002 as improved mix and favorable currency more
than offset modest installation declines and price declines of just
over 5 percent. Strong color-equipment sales growth reflected the
combination of modest installation increases and very favorable mix
due to sales of the DocuColor 6060 and DocuColor iGen3, which were
only partially offset by price declines. Production monochrome
installations declined in the low single digits as declines in
production printing and older technology light lens products more than
offset digital light production growth driven by the Xerox 1010. The
Xerox 1010, our 101 page per minute digital device and first digital
light production device was introduced in November 2002.

Office: 2003 second quarter equipment sales increased 6 percent from
the second quarter 2002 reflecting installation growth and favorable
currency, which were only partially offset by low double-digit price
declines and unfavorable mix. Volume growth was led by multi-function
color, which grew just over 60 percent reflecting the success of the
DocuColor 1632, 2240, and recently launched 3535. Monochrome digital
products also delivered strong growth reflecting the success of the
Document Centre 500 series as well as the initial impact of the
expanded product line, which is competitively priced and includes
upgradeable digital copiers, basic multifunction products (MFPs) that
print and copy, and advanced MFPs that print, copy, fax and scan.

DMO: Equipment sales in the second quarter 2003 grew 39 percent from
the 2002 second quarter reflecting volume growth of over 60 percent.

Post sale and other revenues of $2,643 million declined 4 percent from
$2,754 million in the second quarter 2002, including a 5-percentage
point benefit from currency. These declines reflect lower equipment
installations in previous quarters, 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. Second quarter 2003 supplies, paper and other
sales of $673 million (included within post sale and other revenue)
declined 6 percent from 2002 as supplies and other declines were only
partially offset by growth in paper. Supplies declines reflected a
lower installed base of equipment and reduced sales in the SOHO
business, which we exited in 2001. Service, outsourcing and rental
revenue of $1,970 million declined 3 percent from the 2002 second
quarter as declines in rental, outsourcing and other, particularly in
DMO, were only partially offset by growth in service revenue due to
currency.

Production: 2003 second quarter post sale and other revenue declined
by 3 percent as favorable currency and improved mix, driven largely by
an increased volume of color pages, was more than offset by
double-digit older technology light lens equipment page volume
declines.

Office: 2003 second quarter post sale and other revenue grew 3 percent
as favorable currency impacts and strong page growth in digital
products more than offset light lens page volume declines.

DMO: 2003 second quarter post sale and other revenue declined 20
percent due largely to a lower number of machines at customer
locations, page volume declines and currency devaluation. Equipment
populations in DMO are stabilizing and we therefore expect post sale
declines will continue to moderate.

Other: 2003 second quarter post sale and other revenue declined 10
percent from the 2002 second quarter as declines in SOHO and XES more
than offset the impact of favorable currency.

Key Ratios and Expenses

                                            Q2           Q2
                                           2003         2002
                                           --------------------
    Gross Margin
        Sales                              37.0  %     38.8   %
        Service, outsourcing and rentals   44.4        43.4
        Financing                          63.4        59.6
        Total                              42.4        42.5
    R&D % revenue                           5.7         6.1
    SAG % revenue                          27.8        28.1

Second quarter 2003 total gross margin of 42.4 percent decreased 0.1
percentage point, from 42.5 percent in the second quarter 2002,
including higher pension and other employee benefit expenses totaling
$21 million. 2003 second quarter sales gross margin of 37.0 percent
declined 1.8 percentage points from the second quarter 2002. The
decline reflects the impact of planned lower prices on new products,
competitive price pressure and the benefit expense increase, which was
only partially offset by improved manufacturing productivity and
spending reductions. Service, outsourcing and rentals margin improved
one percentage point to 44.4 percent, primarily reflecting improved
productivity. Second quarter 2003 finance income gross margin improved
3.8 percentage points year-over-year in line with declining market
interest rates specific to our financing business.

Research and development (R&D) expense of $225 million, or 5.7 percent
of revenue, in the 2003 second quarter was $15 million lower than the
second quarter 2002, primarily due to reduced DocuColor iGen3
spending, partially offset by higher pension and other employee
benefit expenses. We continue to invest in technological development,
particularly in color, and believe that 2003 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 $1,089 million
in the 2003 second quarter declined $21 million from the 2002 second
quarter. The decline included $51 million of adverse currency impacts.
2003 second quarter SAG expense reductions reflect the benefit from
previous restructuring actions and the absence of professional fees
associated with the 2001 restatement, partially offset by a $27
million increase in pension and other employee benefit expenses.
Second quarter 2003 bad debt expense of $74 million was in line with
recent trends, but $6 million higher than the second quarter 2002 due
largely to currency impacts.

In the second quarter 2003, we recorded restructuring and asset
impairment charges totaling $37 million ($23 million after taxes),
primarily consisting of new severance actions and pension settlements
related to previous employee restructuring actions. The remaining
restructuring reserve balance at June 30, 2003 for all restructuring
programs was $188 million, the majority of which will be spent during
the balance of 2003.

Worldwide employment of 63,900 declined by 800 from the 2003 first
quarter, including reductions due to our restructuring programs and
other attrition.

Other expenses, net for the three months ended June 30, 2003 and 2002
were as follows:

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

    Non-financing interest expense                     $112       $69
    Currency (gains) losses, net                        (21)       33
    Amortization of intangible assets                     9         9
    Loss on sales of businesses and assets                6        12
    Interest income                                     (12)      (22)
    Loss on early extinguishment of debt                 73         -
    All other, net                                       (1)       15
                                                   --------- ---------
        Total                                          $166      $116
                                                   ========= =========

Second quarter 2003 non-financing interest expense was $43 million
higher than the 2002 second quarter reflecting the higher variable
interest rate associated with the 2002 Credit Facility, the related
amortization of debt issuance costs and mark-to-market losses on our
interest rate swaps of $3 million compared to gains of $13 million in
the second quarter 2002. These increases were partially offset by
savings related to lower average debt balances compared to the 2002
second quarter. We expect non-financing interest expense to be lower
in future periods due to more favorable interest rates and lower
borrowings associated with the recapitalization, which became
effective on June 25, 2003.

In the second quarter 2003, exchange gains of $21 million were due
largely to strengthening of the Brazilian Real and the Euro against
the U.S. dollar. These gains compared to $33 million of unhedged
exchange losses, primarily in Brazil and other DMO countries, in the
second quarter 2002.

The second quarter 2003 loss on sales of businesses and assets related
primarily to the sale of XES subsidiaries in France and Germany, which
was partially offset by a gain on the sale of our investment in Xerox
South Africa. The 2002 second quarter loss primarily related to the
sale of our Italian leasing subsidiary.

Lower invested cash balances and lower average interest rates in the
second quarter 2003 resulted in a reduction in interest income as
compared to the second quarter 2002.

The second quarter 2003 loss on early extinguishment of debt reflects
the write-off of the remaining unamortized fees associated with the
2002 Credit Facility, which was repaid in June 2003 upon completion of
the 2003 recapitalization plan.

In the second quarter 2003 we recorded income tax expense of $53
million compared to $64 million in the second quarter 2002. The
effective tax rate for the second quarter 2003 and 2002 was 36.3
percent and 39.8 percent, respectively.

Our effective tax rate will change based on nonrecurring events (such
as restructuring initiatives) 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 full year 2003
effective tax rate will approximate 40 percent.

Equity in net income of unconsolidated affiliates consists of our 25
percent share of Fuji Xerox income as well as income from other
smaller equity investments.

Minorities' interests in earnings of subsidiaries was $23 million and
$25 million in the second quarters of 2003 and 2002 respectively.
These amounts primarily represent the distributions, net of tax, on
our mandatorily redeemable preferred securities.

Capital Resources and Liquidity

Cash Flow Analysis

The following table summarizes our cash flows for the three months
ended June 30, 2003 and 2002 as reported in our Condensed Consolidated
Statements of Cash Flows:

                                                Three Months Ended
                                                      June 30,
                                                --------------------
    (in millions)                                    2003       2002
    --------------------------------------------- --------- ----------

    Operating Cash Flows                             $682       $624
    Investing Cash (Usage) Flows                      (10)       106
    Financing Cash Usage                           (1,451)    (3,649)
    Effect of exchange rate changes                    23         63
                                                  -------- ----------
    Decrease in cash and cash equivalents            (756)    (2,856)
    Cash and cash equivalents at beginning of
     period                                         3,035      4,747
                                                  -------- ----------
    Cash and cash equivalents at end of period     $2,279     $1,891
                                                  ======== ==========

Second quarter 2003 cash flows from operating activities were $682
million and reflect pre-tax income of $146 million and the following
non-cash items: depreciation and amortization of $189 million,
provisions for receivables and inventory of $98 million, the loss on
early extinguishment of debt of $73 million, restructuring provisions
of $37 million and other non-cash items of $6 million. In addition,
reductions in finance receivables and accounts receivables of $162
million and $100 million, respectively, contributed positively to our
operating cash flow. The receivables reductions reflect the collection
of receivables from prior years' sales without offsetting receivables
increases due to lower revenues in previous quarters and our
transition to third party vendor financing arrangements in Italy,
Brazil, Mexico and the Nordic countries. These cash flows were
partially offset by $84 million of tax payments and $73 million of
restructuring payments. The 2003 second quarter operating cash flow
improved by $58 million over the 2002 second quarter, primarily due to
working capital improvements, partially offset by higher cash tax
payments.

Cash flows from investing activities for the three months ended June
30, 2003 primarily consisted of capital and internal use software
spending partially offset by proceeds from the sale of non-core
businesses and decreases in restricted cash. The 2002 second quarter
included proceeds of $228 million from the sales of our Italian
leasing business and certain manufacturing locations to Flextronics,
partially offset by cash outflows related to restricted investments.

Cash flows from financing activities for the three months ended June
30, 2003 included net payments on secured borrowings with GE and other
vendor financing partners of $187 million. In addition, in April 2003
the holders of our Convertible Subordinated Debentures due 2018
exercised their put option, resulting in debt payments of $560
million. Other scheduled debt payments of $431 million were also made
in the quarter. On June 25, 2003, we completed a $3.6 billion
recapitalization that included public offerings of common stock,
3-year mandatory convertible preferred stock and 7-year and 10-year
senior unsecured notes as well as a new $1 billion credit facility
(the "2003 Credit Facility"). Net proceeds from the recapitalization
were as follows: common stock offering - $451 million, convertible
preferred offering - $889 million and unsecured notes offering -
$1,218 million. The 2003 Credit Facility consists of a $700 million
revolving facility and a $300 million term loan, both maturing in
September 2008. The company does not currently intend to draw the
revolver on an ongoing basis. Net proceeds from the term loan were
$271 million. Xerox used the aggregate net proceeds from the
recapitalization as well as a portion of its current cash balance to
repay and terminate, effective June 25, 2003, the $3,096 million
outstanding under the terminated 2002 Credit Facility. In summary, the
cash changes in debt, net, corresponding to our Condensed Consolidated
Statement of Cash Flows for the three months ended June 30, 2003 were
as follows:

        Payments
        Convertible debentures           $(560)
        Scheduled debt payments           (431)
        2002 Credit Facility            (3,096)
                                      ---------
                                       $(4,087)
                                      ---------
        Borrowings
        2010/2013 Senior Notes          $1,218
        2003 Credit Facility               271
                                      ---------
                                        $1,489
                                      ---------
                                      ---------
        Total                          $(2,598)
                                      =========

Financing activities for the second quarter 2002 consisted of the $2.8
billion repayment under a previous credit facility, other payments of
maturing debt and net proceeds from secured borrowing activity with GE
and other vendor financing partners of $260 million.

During the second quarter 2003 we originated loans, secured by finance
receivables, generating cash proceeds of $329 million and repaid
loans, secured by finance receivables, of $516 million. The proportion
of total finance receivables that are secured is 54 percent,
consistent with the first quarter 2003. We expect to increase the
proportion of our finance receivables that are securitized to
approximately 60 percent by the end of the year. As of June 30, 2003,
debt secured by finance receivables represented approximately 35
percent of total debt.

The following table compares finance receivables to financing-related
debt as of June 30, 2003:

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

Finance Receivables Encumbered by Loans(1) :
     GE Loans - U.S. and Canada                    $3,208      $2,935
     Merrill Lynch Loan - France                      514         443
     U.S. Asset-backed notes                          159          38
     GE Loans - Germany                               111         111
                                             ------------- -----------
Subtotal - SPEs                                     3,992       3,527
     GE Loans - U.K.                                  672         539
     Other Europe                                      84          81
                                             ------------- -----------
Total - Finance Receivable Securitizations         $4,748      $4,147
                                                           ===========
Unencumbered Finance Receivables                   $4,001
                                             -------------
Total Finance Receivables(3)                       $8,749
                                             =============

(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 SPE's.

(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 June 30, 2003.

Debt

Our expected debt maturities for the remainder of 2003 and 2004 by
quarter, and 2005, 2006, 2007 by year and thereafter are as follows:

(in millions)             2003    2004    2005  2006  2007  Thereafter
                        ------- ------- ------- ----- ----- ----------

First Quarter                -    $853
Second Quarter               -     942
Third Quarter             $495     682
Fourth Quarter           1,580   1,316
                        ------- ------- ------- ----- ----- ----------
Full Year               $2,075  $3,793  $2,270  $257  $293     $3,110
                        ======= ======= ======= ===== ===== ==========

Of the debt maturities shown in the above table, the amount that
relates to debt secured by finance receivables for the years 2003,
2004, 2005 and 2006 are as follows: $857 million, $1,746 million,
$1,319 million, and $225 million, respectively.

Recent Events

Public Offering of French Securitization with Merrill Lynch

In December 2002, we received $362 million from Merrill Lynch secured
by finance receivables in France through a warehouse financing
facility. By June 30, 2003 the balance in this facility had increased
to $443 million due to funding of new lease originations. In July 2003
this 364-day facility from Merrill Lynch was replaced with a long-term
public secured financing. As a result of this public financing, we
reclassified $267 million from Current portion of long-term debt to
Long-term debt in our June 30, 2003 Condensed Consolidated Balance
Sheet. In addition, a new warehouse financing facility has been
established with Merrill Lynch. This facility can provide funding of
up to 350 million Euros, outstanding at anytime, for new lease
originations in France and may be securitized through a similar public
offering within two years.

Adoption of SFAS 150

In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). This statement establishes standards for how
certain financial instruments with characteristics of liabilities and
equity are classified in the balance sheet. We were required to adopt
SFAS 150 as of July 1, 2003. As a result of adopting SFAS 150, certain
securities included within the balance sheet caption
"Company-obligated, mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debentures of the
Company" which are currently classified between liabilities and equity
in our Condensed Consolidated Balance Sheet, will be reclassified to a
separate line item within liabilities. In addition, the distributions
related to these instruments which are currently reported net of tax
as a component of "Minorities' interests in earnings of subsidiaries"
in our Condensed Consolidated Statement of Income, will be
prospectively accounted for as interest expense with the tax effects
presented separately. As of July 1, 2003, the third quarter 2003
balance sheet reclassification was approximately $700 million.
After-tax annual distributions and related accretion associated with
these instruments are approximately $34 million ($55 million pre-tax).

S-4 Registration of 9.75 percent senior notes due in 2009

In January 2002, we completed an unregistered offering in the U.S.
($600 million) and Europe (225 million Euros) of 9.75 percent senior
notes due in 2009. On July 25, 2003, we filed a pre-effective
amendment to a previously filed registration statement on Form S-4 to
exchange senior registered notes for these notes. This registration
statement has not yet been declared effective. Once declared
effective, the 0.50 percent interest premium currently paid on these
notes will be terminated.

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

   Short Name: Xerox Corporation
   Category Code: IR
   Sequence Number: 00007645
   Time of Receipt (offset from UTC): 20030727T220952+0100

    --30--DB/ny*

    CONTACT: Xerox Corporation
             Cynthia B. Johnston, 203-968-3489
             Fax 203-968-3944
             Cindy.Johnston@usa.xerox.com

    KEYWORD: CONNECTICUT UNITED KINGDOM INTERNATIONAL EUROPE
    INDUSTRY KEYWORD: SOFTWARE HARDWARE PUBLISHING EARNINGS
COMPUTERS/ELECTRONICS
    SOURCE: Xerox Corporation

Today's News On The Net - Business Wire's full file on the Internet
                          with Hyperlinks to your home page.
                          URL: http://www.businesswire.com