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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended: December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________________ to _____________ Commission File Number 1-4471 A. Full title of the plan and address of the plan, if different from that of the issuer named below: THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Xerox Corporation P.O. Box 1600 Stamford, Connecticut 06904-1600 THE PLAN. Pursuant to the requirements of the Securities Exchange Act of 1934, the person who administer the plan have duly caused this actual report to be signed on its behalf by the undersigned who thereunto duly authorized. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L - C.I.O. - C.L.C. Patricia M. Nazemetz Plan Administrator Stamford, Connecticut Dated June 28, 1999 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Financial Statements and Schedule December 31, 1998 and 1997 (With Independent Auditors' Report Thereon) THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Statement of Net Assets Available for Plan Benefits With Fund Information December 31, 1998 (In thousands) Fund Information Small International Company Balanced Fund Stock U.S. Stock Stock Fifty/ More Fund Fund Fund Fifty Bonds Assets: Investment in Master Trust $ 8,566 22,028 10,488 1,655 741 Participant notes Receivable - - - - - Employer Contributions receivable 63 221 94 41 27 Total assets 8,629 22,249 10,582 1,696 768 Due from (to) other funds (13) (34) (16) (2) (1) Net assets available for plan benefits $ 8,616 22,215 10,566 1,694 767 The accompanying notes are an integral part of the financial statements. Enhanced Xerox More Bond Income Stock Marketplace Employee Stocks Fund Fund Fund Window Loan Fund Total 76,223 406 79,433 53,195 1,090 - 253,825 - - - - - 17,299 17,299 1,079 13 154 649 14 - 2,355 77,302 419 79,587 53,844 1,104 17,299 273,479 (117) (1) (122) (81) (2) 389 - 77,185 418 79,465 53,763 1,102 17,688 273,479 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Statement of Net Assets Available for Plan Benefits With Fund Information December 31, 1997 (In thousands) Fund Information Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund Assets: Investment in Master Trust $ 9,841 12,796 11,520 65,925 Participant notes receivable - - - - Employer contributions receivable 141 399 227 2,535 Total assets 9,982 13,195 11,747 68,460 Liabilities: Accrued expenses and other liabilities 18 9 15 78 Due from (to) other funds (517) 8 72 (280) Due from (to) other plans - (7) (6) (50) Net assets available for plan benefits $ 9,447 13,187 11,798 68,052 The accompanying notes are an integral part of the financial statements. Xerox Income Stock Employee Fund Fund Loan Fund Total 81,395 27,854 - 209,331 - - 12,784 12,784 254 919 - 4,475 81,649 28,773 12,784 226,590 114 6 - 240 (72) 789 - - (2) (290) - (355) 81,461 29,266 12,784 225,995 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Statement of Changes in Net Assets Available for Plan Benefits With Fund Information Year ended December 31, 1998 (In thousands) Fund Information Small Balanced Fund International Company Stock U.S. Stock Stock Fifty/ More Fund Fund Fund Fifty Bonds Contributions: Employer $ 174 390 251 41 27 Employees' - voluntary 805 1,350 1,163 6 2 Rollovers from external plans 8 57 30 - - Rollovers from internal plans 28 28 4 - - Total contributions 1,015 1,825 1,448 47 29 Net income (loss) from Master Trust investments, net of administrative expenses 1,331 4,242 (664) 111 36 Interest income on participant notes receivable - - - - - Total 2,346 6,067 784 158 65 Benefit payments (204) (608) (249) (7) (1) Transfers among funds (2,739) 3,720 (1,538) 1,543 703 Transfer between plans (234) (151) (229) - - Net increase (decrease) in net assets available for plan benefits (831) 9,028 (1,232) 1,694 767 Net assets available for plan benefits Beginning of year 9,447 13,187 11,798 - - End of year $ 8,616 22,215 10,566 1,694 767 The accompanying notes are an integral part of the financial statements. Enhanced Xerox More Bond Income Stock Marketplace Employee Stocks Fund Fund Fund Window Loan Fund Total 1,707 13 890 975 14 - 4,482 4,289 3 4,535 2,502 2 - 14,657 38 - 661 70 - - 864 962 - 1,264 198 - - 2,484 6,996 16 7,350 3,745 16 - 22,487 10,912 15 4,866 18,658 64 - 39,571 - - - - - 1,228 1,228 17,908 31 12,216 22,403 80 1,228 63,286 (2,923) (1) (5,593) (1,019) (2) - (10,607) (3,946) 388 (6,655) 3,772 1,024 3,728 - (1,906) - (1,964) (659) - (52) (5,195) 9,133 418 (1,996) 24,497 1,102 4,904 47,484 68,052 - 81,461 29,266 - 12,784 225,995 77,185 418 79,465 53,763 1,102 17,688 273,479 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Statement of Changes in Net Assets Available for Plan Benefits With Fund Information Year ended December 31, 1997 (In thousands) Fund Information Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund Contributions: Employees' - voluntary $ 848 1,017 1,026 3,996 Employer 252 519 359 3,155 1,100 1,536 1,385 7,151 Net income from Master Trust investments, net of administrative expenses 781 2,863 1,596 10,665 Interest income on Participant notes receivable - - - - 1,881 4,399 2,981 17,816 Benefit payments (339) (194) (221) (2,254) Transfers among funds (311) 1,624 1,222 2,472 Transfer between plans - (7) (6) (50) Net increase (decrease) in net assets available for plan benefits 1,231 5,822 3,976 17,984 Net assets available for plan benefits: Beginning of Year 8,216 7,365 7,822 50,068 End of year $ 9,447 13,187 11,798 68,052 The accompanying notes are an integral part of the financial statements. Xerox Income Stock Employee Fund Fund Loan Fund Total 5,173 1,651 - 13,711 1,079 1,116 - 6,480 6,252 2,767 - 20,191 5,679 7,032 - 28,616 - - 973 973 11,931 9,799 973 49,780 (6,561) (484) - (10,053) (9,092) 3,856 229 - (2) (290) - (355) (3,724) 12,881 1,202 39,372 85,185 16,385 11,582 186,623 81,461 29,266 12,784 225,995 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements December 31, 1998 and 1997 (1) Description of Plan The following description of the Profit Sharing and Savings Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. (Plan) provides only general information. Participants should refer to the summary plan description and the Plan document for a more complete description of the Plan's provisions. General The Plan is a defined contribution plan covering substantially all domestic full and part-time Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. employees of Xerox Corporation (sponsor). Employees are eligible to participate in the 401(K) savings portion of the Plan immediately upon hire. Plan Amendment As of January 1, 1998, each employee shall immediately become a participant under the Plan for the purpose of determining eligibility. Effective January 1, 1998, the Company modified the profit sharing payout amounts beginning with the Plan year ended December 31, 1998. In 1998, profit sharing distributions were 50% in cash and 50% in stock options (stock options are not a component of the Plan). In 1999, profit sharing payouts will be 50% in cash, 25% in deferred compensation and 25% in stock options. See Xerox Profit Sharing Contributions disclosure in note 1 for further information. Effective January 1, 1998, the Plan Administrator amended the provisions of the Plan pertaining to the valuation date used to value assets of the Plan. This amendment requires the Plan Trustee to value the assets held in each separate fund as of the close of each business day. The Trustee shall appraise them at their market or estimated fair value each day and reflect increases or decreases in the value of each separate fund. Previously, assets of the Plan were valued once a month. Payments of Benefits Upon termination of service, a participant may elect to receive either a lump sum amount equal to the value of his or her account or may purchase an annuity payable from a life insurance company. There were no benefits allocated from the Plan for participants at December 31, 1998 or 1997. Employee Savings Contributions Subject to limits imposed by the Internal Revenue Code, eligible employees may contribute up to 18% of pay (as defined in the Plan) through a combination of before-tax and after-tax payroll deductions. Employees are immediately vested in their savings contributions. Xerox Corporation matches 35% of employee savings contributions, up to a maximum match equaling 4% of annual pay. These contributions are made annually to eligible participants of record on the last day of February following the Plan year-end. The 1998 contribution recorded on March 12, 1999 was $2,355. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (1) Description of Plan, Continued Xerox Profit Sharing Contributions Eligible employees may receive a profit sharing contribution from the sponsor. In prior years the contribution payout has ranged from zero to 10% of pay and was based upon the return on assets (ROA) of the Xerox Document Processing industry segment as defined in the Plan document. ROA is determined as of the sponsor's calendar year. In 1999 and forward, the maximum profit sharing payout will be 15%. In any given year, the payout bears a 1:1 relationship to earnings per share (EPS) growth up to 15%. However, if EPS growth is below 5%, there is no payout. Prior to 1998, an employee may have received the contribution in cash or may have elected to invest all or part of the contribution on a tax deferred basis, subject to limits imposed by the Internal Revenue Code, through the Plan's investment funds. Employees are immediately vested in profit sharing contributions. Under the new profit sharing format, a payout will have three components. They are as follows: (i) 50% of the payout will come in the form of cash which can be deferred into the savings plan, (ii) 25% of the payout is automatically deferred to the Xerox Stock fund and (iii) 25% of the payout is provided in the form of stock options, which are not a component of the Plan. During 1998, the sponsor's ROA was 17.5%, which resulted in a maximum profit sharing contribution for all eligible active employees at December 31, 1998 equal to 5% of pay or $11,443 and 5% in stock options which are not a component of the Plan. Participants elected to invest $2,355 into the Plan at December 31, 1998 (dollars in thousands). During 1997, the sponsor's ROA was 18.0%, which resulted in an optional profit sharing contribution for all eligible active employees at December 31, 1997 equal to 10.0% of pay or $21,234. Participants elected to invest $4,475 into the Plan at December 31, 1997 (dollars in thousands). Investment Funds As further described in note 3, the investment funds are part of the Xerox Trust Agreement to Fund Retirement Plans (Master Trust). Effective October 1, 1998, the sponsor added four new investment funds: Balanced Fund - Fifty/ Fifty, Balanced Fund - More Bond, Enhanced Bond Fund and Marketplace Window. Additionally, the Balanced Fund name was changed to Balanced Fund - More Stocks. Employees can direct their plan accounts to one or more of the following ten investment funds: International Stock Fund - Invests primarily in stocks of companies outside the U.S. U.S. Stock Fund - Invests primarily in stocks of medium to large U.S. companies. Small Company Stock Fund - Invests primarily in stocks of smaller U.S. companies. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (1) Description of Plan, Continued Balanced Fund - Fifty/Fifty - Usually invests approximately 50% in stocks and 50% in bonds; some private placements and cash. The mix may shift with market outlook. Balanced Fund - More Bonds - Usually invests 30% in stocks, most of the rest in bonds, some private placements and cash. The mix may shift with market outlook. Balanced Fund - More Stocks - Usually invests approximately 70% in stocks: some private placements and cash. The mix may shift with market outlook. Enhanced Bond Fund - Invests in intermediate duration; approximately 70% high quality bonds and 30% high-yield lower quality bonds. Income Fund - Invests short to intermediate duration, high quality bonds; contracts with insurance companies and banks. Xerox Stock Fund - Invests in Xerox Corporation common stock and some cash for administrative purposes. Marketplace Window - Offers access to no-load mutual funds outside of Xerox. Employee Loan Fund Participants are permitted to borrow from their profit sharing savings accounts subject to certain limitations. The loans are payable over terms up to 14.5 years and bear interest at the quarterly Citibank commercial prime rate in effect at the time of loan issuance plus 1%. Principal and interest payments on the loans are redeposited into the participants' accounts based on their current investment allocation elections. Loans are issued at market value. At December 31, 1998, market value on loans approximates fair value. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (2) Federal Income Taxes The Plan obtained its latest determination letter from the Internal Revenue Service (IRS) on September 8, 1995, covering Plan amendments through December 31, 1994, indicating that the Plan, as designed, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan administrator and Plan's internal tax counsel believe that the Plan, as currently designed and operated, is in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, they believe that the Plan was qualified and the related trust was tax-exempt as of the financial statement date. As long as the Plan continues to be qualified under present federal income tax laws and regulations, participants will not be taxed on company contributions or on investment earnings on such contributions at the time such contributions and investment earnings are received by the trustee, but may be subject to tax thereon at such time as they receive distributions under the Plan. (3) Master Trust As discussed in note 1, the Plan participates in the Master Trust. The following other Xerox employee benefit plans also participate in the Master Trust as of December 31, 1998: Xerox Corporation Profit Sharing and Savings Plan; Xerox Corporation Retirement Income Guarantee Plan; and Retirement Income Guarantee Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. The Master Trust has nine investment pools - the International Stock Pool, U.S. Stock Pool, Small Company Stock Pool, Other Equity Pool, Other Fixed Pool, Bond Pool, Income Fund, Xerox Stock Fund, and Marketplace Window. Participants direct their accounts into investment funds, as described in note 1, which participate in the aforementioned investment pools. Each of the plans has an ownership interest in one or more of these investment pools in accordance with that interest as determined by participant fund elections. In 1998, all accrued administrative expenses are recorded at the Master Trust level only, and as a result, are net against the investment in Master Trust at the Plan level. For the year ended December 31, 1997, the accrued administrative expenses and due from (to) other funds activity is recorded at both the Master Trust and plan level. The Expense Pool represents administrative expenses that are attributable only to the three Balanced Funds. It is not an investment pool. These expenses are allocated from the pool level to the Balanced Fund - Fifty/Fifty, Balanced Fund - - More Bonds, and the Balanced Fund - More Stocks, based on the net asset fund balances at the end of each month. In October 1998, there was pool restructure. Assets of the All Other Pool were transferred to the Other Equity Pool and the Bond Pool. The pool restructure was done in conjunction with the addition of new investment funds as discussed in note 1. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The following financial information is presented for the Master Trust and each of the Master Trust investment pools: Statement of Net Assets of the Master Trust as of December 31, 1998 is as follows (in thousands): Small International Company Stock U.S. Stock Stock All Other Income Assets Pool Pool Pool Pool Fund Cash (overdraft) $ 16,520 (141) 1,088 - (4,469) Receivables: Dividends 1,371 2,687 501 - - Interest 198 638 215 - 9,664 Due from brokers 3,227 7,697 1,783 - 77,389 Other 30 11 (1) - (225) Total receivables 4,826 11,033 2,498 - 86,828 Investments at fair value: At quoted market value: Short-term Investments 29,261 160,154 67,680 - 188,727 Fixed income Investments 3,637 - - - 781,381 Equity securities: Xerox common stock - - - - - Other 1,033,271 2,842,337 613,346 - 5,973 At estimated fair value: Interest in real estate trusts - - - - - Other investments - - - - - Investments at contract value: Investment contracts with insurance companies and banks - - - - 62,861 Total investments1,066,169 3,002,491 681,026 - 1,038,942 Total assets 1,087,515 3,013,383 684,612 - 1,121,301 Liabilities Due to brokers (3,983) (6,052) (2,607) - (183,652) Other (2,053) (1,692) (751) - (500) Net assets $ 1,081,479 3,005,639 681,254 - 937,149 Xerox Other Other Stock Equity Fixed Marketplace Bond Expense Fund Pool Pool Window Pool Pool Total - - - - 15,757 - 28,755 1,962 22 - - - - 6,543 33 1,403 660 - 16,511 - 29,322 - 6,359 - - 17,986 - 114,441 10 - - - (143) - (318) 2,005 7,784 660 - 34,354 - 149,988 9,401 335,740 159,972 - 78,006 - 1,028,941 - 3,221 - - 1,519,208 - 2,307,447 632,445 - - - - - 632,445 - 114,059 - 19,796 104,887 - 4,733,669 - 31,562 - - - - 31,562 - 208,894 - - - - 208,894 - - - - - - 62,861 641,846 693,476 159,972 19,796 1,702,101 - 9,005,819 643,851 701,260 160,632 19,796 1,752,212 - 9,184,562 - (6,359) - - (115,955) - (318,608) (92) (311) (162) - (1,374) (72) (7,007) 643,759 694,590 160,470 19,796 1,634,883 (72) 8,858,947 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The allocation of Master Trust net assets by investment pool as of December 31, 1998 is as follows (in thousands): Small International Company Balanced Balanced Stock U.S. Stock Stock Fund Fund Fund Fund Fund Fifty/Fifty More Bonds International Stock Pool $ 184,457 - - 6,100 2,870 U.S. Stock Pool - 426,768 - 17,536 8,252 Small Company Stock Pool - - 199,672 3,275 1,541 All Other Pool - - - - - Income Fund - - - - - Xerox Stock Fund - - - - - Other Equity Pool - - - 4,936 2,010 Other Fixed Pool - - - 2,700 513 Marketplace Window - - - - - Bond Pool - - - 10,987 5,170 Expense Pool - - - - - Total $ 184,457 426,768 199,672 45,534 20,356 Balanced Xerox Fund Enhanced Income Stock Marketplace More Stocks Bond Fund Fund Fund Window Total 888,052 - - - - 1,081,479 2,553,083 - - - - 3,005,639 476,766 - - - - 681,254 - - - - - - - - 937,147 - - 937,149 - - - 643,759 - 639,759 687,644 - - - - 694,590 157,257 - - - - 160,470 - - - - 19,796 19,796 1,599,517 19,209 - - - 1,634,883 (72) - - - - (72) 6,362,247 19,209 937,147 634,759 19,796 8,858,947 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Investment in the Master Trust for all participating plans as of December 31, 1998 is as follows (in thousands): Small Balanced Balanced International Company Fund Fund Stock U.S. Stock Stock Fifty/ More Fund Fund Fund Fifty Bonds Xerox Corporation Profit Sharing and Savings Plan $175,891 404,740 189,184 43,879 19,615 The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. 8,566 22,028 10,488 1,655 741 Xerox Corporation Retirement Income Guarantee Plan - - - - - Retirement Income Guarantee Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L.- C.I.O. - C.L.C - - - - - Total $ 184,457 426,768 199,672 45,534 20,356 Balanced Xerox Fund Enhanced Income Stock Marketplace More Stocks Bond Fund Fund Fund Window Total 1,102,063 18,803 692,898 590,564 18,706 3,256,343 76,223 406 79,433 53,195 1,090 253,825 4,686,540 - 143,631 - - 4,830,171 497,421 - 21,187 - - 518,608 6,362,247 19,209 937,149 643,759 19,796 8,858,947 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Statement of Net Assets of the Master Trust as of December 31, 1997 is as follows (in thousands): Small International Company Stock U.S. Stock Stock All Other Assets Pool Pool Pool Pool Cash (overdraft) $ (440) 267 (369) (13) Receivables: Dividends 1,189 2,006 204 109 Interest 241 750 788 14,841 Due from brokers 11,242 8,371 16,328 85,683 Other - 584 - - Total receivables 12,672 11,711 17,320 100,633 Investments at fair value: At quoted market value: Short-term Investments 44,106 163,878 229,101 251,836 Fixed income Investments 4,974 - - 1,254,278 Equity securities: Xerox common stock - - - - Other 974,400 2,325,093 729,193 358,595 At estimated fair value: Interest in real Estate trusts - - - 75,286 Other investments - - - 139,546 Investments at contract value: Investment contracts with insurance companies and banks - - - - Total investments 1,023,480 2,488,971 958,294 2,079,541 Total assets 1,035,712 2,500,949 975,245 2,180,161 Liabilities Due to brokers 2,047 2,553 155 138,661 Other 6,688 - 2,232 6,656 Net assets $ 1,026,977 2,498,396 972,858 2,034,844 Xerox Income Stock Fund Fund Total (92) - (647) - 1,461 4,969 8,193 5 24,818 13,113 - 134,737 - 7,033 7,617 21,306 8,499 172,141 74,440 432 763,793 588,632 - 1,847,884 - 337,074 337,074 2,168 - 4,389,449 - - 75,286 - - 139,546 278,817 - 278,817 944,057 337,506 7,831,849 965,271 346,005 8,003,343 38,230 - 181,646 140 - 15,716 926,901 346,005 7,805,981 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The allocation of Master Trust net assets by investment pool as of December 31, 1997 is as follows(in thousands): Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund International Stock Pool $ 168,558 - - 858,419 U.S. Stock Pool - 259,252 - 2,239,144 Small Company Stock Pool - - 210,374 762,484 All Other Pool - - - 2,034,844 Income Fund - - - - Xerox Stock Fund - - - - Total $ 168,558 259,252 210,374 5,894,891 Xerox Income Stock Fund Fund Total - - 1,026,977 - - 2,498,396 - - 972,858 - - 2,034,844 926,901 - 926,901 - 346,005 346,005 926,901 346,005 7,805,981 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Net assets in the Master Trust for all participating plans as of December 31, 1997 are as follows(in thousands): Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund Xerox Corporation Profit Sharing and Savings Plan* $ 159,252 246,464 198,802 936,262 The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. 9,306 12,788 11,572 65,516 Xerox Corporation Retirement Income Guarantee Plan - - - 4,391,615 Retirement Income Guarantee Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. - - - 501,498 Total $ 168,558 259,252 210,374 5,894,891 * The net asset balances at the master trust level do not include the optional profit sharing accrual at December 31, 1997, which is recorded at the Plan level only. Xerox Income Stock Fund Fund Total 636,139 317,658 2,494,577 81,207 28,347 208,736 183,117 - 4,574,732 26,438 - 527,936 926,901 346,005 7,805,981 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Statement of Changes in Net Assets of the Master Trust as of December 31, 1998 is as follows (in thousands): Small International Company Stock U.S. Stock Stock All Other Income Pool Pool Pool Pool Fund Additions: Transfers in $ 43,514 139,522 51,756 418,842 126,050 Investment earnings: Interest 2,206 8,198 6,948 59,043 57,481 Dividends 19,994 26,128 2,502 12,123 435 Net appreciation (depreciation)140,075 663,920 (6,208) 25,060 5,737 Margin variation on futures contracts 1,217 7,864 350 13,831 (287) Other (775) 1,911 639 22,210 (104) Total investment earnings 162,717 708,021 4,231 132,267 63,262 Total additions 206,231 847,543 55,987 551,109 189,312 Deductions: Administrative expenses (8,531) (7,852) (4,300) (7,872) (2,341) Transfers out (53,101) (58,284) (52,728) (442,927) (176,723) Total deductions (61,632) (66,136) (57,028) (450,799) (179,064) Transfers between funds/pools (90,097) (274,164) (290,563) 313,106 - Pool restructure - - - (2,448,260) - Net assets: Beginning of year 1,026,977 2,498,396 972,858 2,034,844 926,901 End of year $1,081,479 3,005,639 681,254 - 937,149 Xerox Other Other Stock Equity Fixed Marketplace Bond Expense Fund Pool Pool Window Pool Pool Total 102,002 125,652 118,979 18,839 18,136 - 1,163,292 445 4,308 3,270 - 17,068 - 158,967 7,453 3,749 - 569 1,195 - 74,148 221,414 60,417 14,876 735 16,842 - 1,142,868 - 7,862 1,321 - (7,125) - 25,033 - 3,156 (2) - (439) - 26,596 229,312 79,492 19,465 1,304 27,541 - 1,427,612 331,314 205,144 138,444 20,143 45,677 - 2,590,904 (668) (301) (346) (1) (1,443) (391) (34,046) (32,892)(600,735) (85,628) (346) (528) - (1,503,892) (33,560)(601,036) (85,974) (347) (1,971) (391) (1,537,938) - 230,399 108,000 - 3,000 319 - - 860,083 - - 1,588,177 - - 346,005 - - - - - 7,805,981 643,759 694,590 160,470 19,796 1,634,883 (72) 8,858,947 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The allocation of net income (loss) from Master Trust investments, net of administrative expenses, by investment pool and fund for December 31, 1998 is as follows (in thousands): Small International Company Balanced Balanced Stock U.S. Stock Stock Fund Fund Fund Fund Fund Fifty/Fifty More Bonds International Stock Pool $ 25,486 - - 875 412 U.S. Stock Pool - 86,279 - 1,167 397 Small Company Stock Pool - - (9,729) 66 31 All Other Pool - - - - - Income Fund - - - - - Xerox Stock Fund - - - - - Other Equity Pool - - - 538 253 Other Fixed Pool - - - 130 61 Marketplace Window - - - - - Bond Pool - - - 176 83 Expense Pool - - - - - Total $ 25,486 86,279 (9,729) 2,952 1,237 Balanced Xerox Fund Enhanced Income Stock Marketplace More Stocks Bond Fund Fund Fund Window Total 127,413 - - - - 154,186 612,326 - - - - 700,169 9,563 - - - - (69) 124,395 - - - - 124,395 - - 60,921 - - 60,921 - - - 228,644 - 228,644 78,400 - - - - 79,191 18,928 - - - - 19,119 - - - - 1,303 1,303 25,595 244 - - - 26,098 (391) - - - - (391) 996,229 244 60,921 228,644 1,303 1,393,566 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Net income (loss) from Master Trust Investments, net of administrative expenses, for all participating pans for the year ended December 31, 1998 is as follows (in thousands): Small Balanced Balanced International Company Fund - Fund - Stock U.S. Stock Stock Fifty/ More Fund Fund Fund Fifty Bonds Xerox Corporation Profit Sharing and Savings Plan $ 24,155 82,037 (9,065) 2,841 1,201 The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. 1,331 4,242 (664) 111 36 Xerox Corporation Retirement Income Guarantee Plan - - - - - Retirement Income Guarantee Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. - - - - - Total $ 25,486 86,279 (9,729) 2,952 1,237 Balanced Fund- Enhanced Xerox More Bond Income Stock Marketplace Stocks Fund Fund Fund Window Total 161,361 229 43,553 209,986 1,239 517,537 10,912 15 4,866 18,658 64 39,571 746,740 - 10,952 - - 757,692 77,216 - 1,550 - - 78,766 996,229 244 60,921 228,644 1,303 1,393,566 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Statement of Changes in Net Assets of the Master Trust for the year ended December 31, 1997 is as follows (in thousands): Small International Company Stock U.S. Stock Stock All Other Pool Pool Pool Pool Additions: Transfers in $ 22,392 30,110 27,308 79,711 Investment earnings: Interest 1,818 5,765 7,611 93,314 Dividends 18,530 29,592 4,125 29,467 Net appreciation (depreciation) 72,184 592,165 133,630 134,587 Margin variation on futures contracts (1,678) 926 2,147 3,096 Other 1,078 611 540 9,486 Total investment earnings 91,932 629,059 148,053 269,950 Total additions 114,324 659,169 175,361 349,661 Deductions: Administrative expenses 7,380 4,682 5,395 19,115 Transfers out 9,718 10,240 9,109 259,992 Total deductions 17,098 14,922 14,504 279,107 Transfers between funds/pools (36,548) 33,302 19,894 20,670 Net assets: Beginning of year 966,299 1,820,847 792,107 1,943,620 End of year $ 1,026,977 2,498,396 972,858 2,034,844 Xerox Income Stock Fund Fund Total 47,685 31,600 238,806 62,740 102 171,350 376 5,493 87,583 2,147 84,305 1,019,018 112 - 4,603 4,484 20 16,219 69,859 89,920 1,298,773 117,544 121,520 1,537,579 2,543 324 39,439 119,045 18,291 426,395 121,588 18,615 465,834 (66,762) 29,313 (131) 997,707 213,787 6,734,367 926,901 346,005 7,805,981 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The allocation of net income from Master Trust investments, net of administrative expenses, by investment pool and fund for the year ended December 31, 1997 is as follows (in thousands): Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund International Stock Pool $ 14,334 - - 70,218 U.S. Stock Pool - 64,659 - 559,718 Small Company Stock Pool - - 31,105 111,553 All Other Pool - - - 250,835 Income Fund - - - - Xerox Stock Fund - - - - Total $ 14,334 64,659 31,105 992,324 Xerox Income Stock Fund Fund Total - - 84,552 - - 624,377 - - 142,658 - - 250,835 67,316 - 67,316 - 89,596 89,596 67,316 89,596 1,259,334 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued Net income from Master Trust Investments, net of administrative expenses, for all participating plans for the year ended December 31, 1997 is as follows (in thousands): Small International Company Stock U.S. Stock Stock Balanced Fund Fund Fund Fund Xerox Corporation Profit Sharing and Savings Plan $ 13,553 61,796 29,509 144,050 The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. -C.L.C. 781 2,863 1,596 10,665 Xerox Corporation Retirement Income Guarantee Plan - - - 751,651 Retirement Income Guarantee Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L C.I.O. - C.L.C. - - - 85,958 Total $ 14,334 64,659 31,105 992,324 Xerox Income Stock Fund Fund Total 46,330 82,564 377,802 5,679 7,032 28,616 13,398 - 765,049 1,909 - 87,867 67,316 89,596 1,259,334 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued With respect to the Plan, the Joint Administrative Board (JAB) is responsible for establishing investment guidelines, reviewing the investment decisions and reviewing investment results. The JAB consists at present of three Xerox Corporation representatives and five union representatives. Marketable securities are valued at the last reported sales price on the last business day of the year. Quotations are obtained from national securities exchanges or, in instances where securities are not listed on any of the exchanges, quotations are obtained from brokerage firms. Non-readily marketable investments, which include private placements, are carried at fair value, based on the cost of the investments, developments concerning the portfolio of investments of the private placements, and such other factors as the managing general partners of the investments consider relevant. The valuations do not necessarily represent amounts which might ultimately be realized from the investments. The value of the investment contracts with insurance companies and banks is at contract value, which approximates fair value. In connection with the investment contracts, all of which are fully benefit-responsive, the following information is presented (dollars in thousands): (i) The average investment yields for the years ended December 31, 1998 and 1997 were 7.1% and 6.8%, respectively. (ii) The crediting interest rates at December 31, 1998 and 1997 ranged from 4.4% to 9.3%. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued (iii) The fair value, as determined by discounting estimated future cash flows for traditional GIC's, and the market value of the underlying investments and the associated wrapper for synthetic GIC's at December 31, 1998 and 1997 was $63,780 and $274,344 respectively. Contract values were $62,861 and $278,817 at December 31, 1998 and 1997, respectively. The Master Trust invests in real estate group trusts. These trusts provide pension and profit sharing plans with a medium for pooling their funds for investment in income producing real estate. The investment trusts value real estate holdings at estimated market value based upon independent appraisals, consideration of significant changes in economic circumstances, and capital additions made to properties after the appraisal date. Such market value estimates necessarily involve subjective judgments. Accordingly, the actual market price of the real estate can only be determined by negotiation between independent third parties in a sales transaction. Purchases and sales of securities are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded as earned. Margin variation represents market fluctuations on futures investments. Derivative financial instruments are used by the Master Trust's equity and balanced portfolio investment managers primarily to rebalance the fixed income/ equity allocation of the Master Trust's portfolio and to hedge the currency risk component of the Master Trust's foreign investments. Certain of the Master Trust's fixed income investment managers are permitted to use certain specified types of derivative instruments as part of their respective strategies. These strategies include the use of futures and options as substitutes for certain types of fixed income securities. Leveraging of the Master Trust's assets and speculation are prohibited. Currency hedge positions are not permitted to exceed the level of exposure in the related Master Trust's assets. The derivatives most commonly used by the investment managers are highly liquid exchange traded equity and fixed income futures and over-the-counter foreign exchange forward contracts. The use of derivative instruments is not believed to materially increase the credit or market risk of the Master Trust's investment. THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust,Continued The net appreciation (depreciation) of investments for the year ending December 31, 1998 is as follows (in thousands): Small International Company All Stock U.S. Stock Stock Other Income Pool Pool Pool Pool Fund Investments at quoted market value: Short-term and fixed income investments $ 310 - - 10,107 5,737 Xerox common Stock - - - - - Other equity investments 139,765 663,920 (6,208) 2,884 - Investments at estimated fair value: Interest in real estate trusts - - (20,107) - Other investments - - - 32,176 - Total $ 140,075 663,920 (6,208) 25,060 5,737 Xerox Other Other Stock Equity Fixed Marketplace Bond Expense Fund Pool Pool Window Pool Pool Total - - 14,876 - 8,444 - 39,474 221,414 - - - - - 221,414 - 57,463 - 735 8,398 - 866,957 - (4,026) - - - - (24,133) - 6,980 - - - - 39,156 221,414 60,417 14,876 735 16,842 - 1,142,868 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (3) Master Trust, Continued The net appreciation (depreciation) of investments for the year ending December 31, 1997 is as follows (in thousands): U.S. Small International Stock Company All Other Stock Pool Pool Stock Pool Pool Investment at quoted market value: Short-term and fixed income investments $ (2,173) - - 38,188 Xerox common stock - - - - Other equity investments 74,357 592,165 133,630 75,517 Investments at estimated fair value: Interest in real estate trusts - - - (8,320) Other investments - - - 29,202 Total $ 72,184 592,165 133,630 134,587 Income Xerox Fund Stock Fund Total 2,147 - 38,162 - 84,305 84,305 - - 875,669 - - (8,320) - - 29,202 2,147 84,305 1,019,018 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (4) Unit Values The interests of Plan participants in each of the funds is expressed in terms of units, representing undivided interests in the net assets of the fund. As of January 1, 1998, unit values are calculated daily by dividing the total value of net assets of each fund (reduced by employer contributions receivable not yet received by the Master Trust, and other reconciling items) by units outstanding at the valuation date. The total number of units and net asset value per unit outstanding during the year ended December 31, 1998 was as follows: International Stock Fund U.S. Stock Fund Units Unit Units Unit Outstanding Value Outstanding Value January 31 920,364 $10.382375 1,291,659 $10.099668 February 28 917,743 10.962610 1,396,344 10.877374 March 31 929,145 11.657176 1,521,651 11.420459 April 30 939,875 11.716992 1,589,919 11.548355 May 31 885,484 11.786185 1,586,323 11.334877 June 30 875,981 11.661331 1,602,319 11.805511 July 31 869,231 11.814280 1,638,896 11.677048 August 31 801,354 10.275574 1,633,809 9.990193 September 30 778,819 9.900287 1,585,081 10.570626 October 31 759,733 10.684862 1,556,811 11.456733 November 30 755,513 11.218222 1,665,713 12.135353 December 31 736,627 11.628680 1,698,600 12.968329 Balanced Fund - Fifty/Fifty Balanced Fund - More Bonds Units Unit Units Unit Outstanding Value Outstanding Value January 31 - $ - - $ - February - - - - March 31 - - - - April 30 - - - - May 31 - - - - June 30 - - - - July 31 - - - - August 31 - - - - September 30 - - - - October 31 59,367 10.535520 34,437 10.327282 November 30 98,419 10.945811 37,569 10.669218 December 31 146,790 11.274600 68,111 10.879377 Enhanced Bond Fund Income Fund Units Unit Units Unit Outstanding Value Outstanding Value January 31 - $ - 8,004,190 $10.076927 February 28 - - 7,475,936 10.105522 March 31 - - 7,392,511 10.156731 April 30 - - 7,481,069 10.206823 May 31 - - 6,995,465 10.267817 June 30 - - 6,942,159 10.316044 July 31 - - 6,905,492 10.368480 August 31 - - 7,134,306 10.468176 September 30 - - 7,270,669 10.602034 October 31 56,931 9.905175 7,463,054 10.619355 November 30 54,028 10.125494 7,390,631 10.615745 December 31 40,065 10.133596 7,444,002 10.670738 Small Company Stock Fund Units Unit Outstanding Value 1,152,655 $9.884830 1,199,675 10.740566 1,273,539 11.292184 1,270,346 11.426224 1,264,722 10.750264 1,233,290 10.808698 1,237,790 9.932038 1,179,068 7.840207 1,141,593 8.180712 1,130,332 8.618658 1,124,406 9.071812 1,082,499 9.688692 Balanced Fund - More Stocks Units Unit Outstanding Value 6,424,779 $10.145639 6,506,838 10.636311 6,809,733 11.026386 6,831,274 11.119027 6,744,577 11.030174 6,711,987 11.213429 6,764,278 11.121109 6,706,497 10.007453 6,497,740 10.286159 6,397,539 10.815761 6,449,787 11.298588 6,480,952 11.761080 Xerox Stock Fund Units Unit Outstanding Value 2,801,232 $10.874319 3,005,216 11.964169 3,099,139 14.360530 3,169,325 15.300170 3,389,547 13.872963 3,523,815 13.772022 3,548,464 14.295476 3,510,909 11.928028 3,672,590 11.567694 3,484,772 13.194813 3,409,313 14.620633 3,309,095 16.075393 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (4) Unit Values, Continued The total number of units and net asset value per unit outstanding during the year ended December 31, 1997 was as follows: International Stock Fund U.S. Stock Fund Units Unit Units Unit Outstanding Value Outstanding Value January 31 5,239,115 $1.543425 4,406,217 $1.728658 February 28 5,341,029 1.562208 4,497,210 1.740928 March 31 5,888,573 1.575980 5,116,762 1.658333 April 30 5,976,454 1.588181 5,196,816 1.751299 May 31 6,116,208 1.659004 5,232,406 1.866003 June 30 6,240,107 1.730076 5,317,968 1.944255 July 31 6,384,348 1.782436 5,507,272 2.108241 August 31 6,350,969 1.672465 5,519,315 2.010197 September 30 6,398,872 1.792312 5,648,647 2.132616 October 31 6,404,805 1.648348 5,762,266 2.063432 November 30 6,170,905 1.642708 5,915,669 2.143173 December 31 5,545,281 1.678099 5,860,645 2.182085 Balanced Fund Income Fund Units Unit Units Unit Outstanding Value Outstanding Value January 31 3,634,982 $13.978013 13,168,371 $6.521293 February 28 3,658,895 14.012611 13,032,286 6.549495 March 31 3,879,230 13.655406 12,792,540 6.565563 April 30 3,911,827 14.002261 12,684,713 6.609874 May 31 3,917,352 14.697693 12,669,561 6.647454 June 30 3,960,669 15.241481 12,478,600 6.690273 July 31 3,999,184 16.038329 12,426,027 6.750195 August 31 3,998,824 15.663793 12,261,985 6.768509 September 30 4,013,888 16.426774 12,115,934 6.816442 October 31 4,029,870 16.027899 11,891,043 6.864514 November 30 4,033,987 16.190160 11,679,523 6.886846 December 31 4,000,763 16.375997 11,715,189 6.931774 Small Company Fund Units Unit Outstanding Value 4,388,720 $1.747487 4,604,685 1.694722 5,292,188 1.616296 5,387,273 1.611924 5,420,222 1.790273 5,399,110 1.878601 5,453,861 2.005116 5,448,500 2.032599 5,572,707 2.181263 5,666,433 2.058766 5,917,651 2.034271 5,736,340 2.017311 Xerox Stock Fund Units Unit Outstanding Value 2,322,532 $7.688210 2,377,978 8.205805 2,494,075 7.508071 2,530,923 8.121978 2,536,632 8.950173 2,570,875 10.460962 2,566,887 10.942996 2,614,097 10.046536 2,627,063 11.236564 2,682,074 10.582841 2,736,029 10.361126 2,869,738 9.877945 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (5) Reconciliation of Financial Statements to Form 5500 The following is a reconciliation of net assets available for plan benefits paid to participants as reported in the financial statements to the Form 5500 at December 31, 1998 and 1997: December 31, 1998 1997 (in thousands) Net assets available for plan benefits as reported in the Plan financial statements $ 273,479 225,996 Benefit claims payable reported on line 31g of Form 5500 - - Net assets available for plan benefits as reported in the Plan Form 5500 $ 273,479 225,996 December 31 1998 1997 (in thousands) Benefits paid to participants as reported in the Plan financial statements $ 10,607 10,052 Add: Amounts allocated to withdrawing participants at December 31, 1998 and 1997 - - Less: Amounts allocated to withdrawing participants at December 31, 1997 and 1996, respectively - (123) Benefits paid to participants as reported in the Form 5500 $ 10,607 9,929 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Notes to Financial Statements, Continued (5) Reconciliation of Financial Statements to Form 5500, Continued Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, but not yet paid as of that date. (6) Stock Split In March 1999, the shareholders of the plan sponsor approved a two-for-one stock split of the Company's common stock. The stock split does not impact the value of participants' interest in the Xerox Stock Fund. Schedule 1 THE PROFIT SHARING PLAN OF XEROX CORPORATION AND THE XEROGRAPHIC DIVISION, UNION OF NEEDLETRADES, INDUSTRIAL AND TEXTILE EMPLOYEES A.F.L. - C.I.O. - C.L.C. Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998 (in thousands) Description of investment including Identity of issuer, maturity date, rate of borrower, interest, collateral, Current lessor, or similar party par or maturity value Cost value Investment in Master Trust (1) $ 203,099 $ 253,825 *Investment in Participant Loans to Plan participants, Notes Receivable maturity dates through 5/31/11, interest rates from 8.0% to 11.5% -- 17,299 per annum * Party-in-interest (1) See note 3 Independent Auditors' Report The Plan Administrator and Participants The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C.: We have audited the accompanying statements of net assets available for plan benefits of The Profit Sharing Plan of Xerox Corporation and the Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. (Plan) as of December 31, 1998 and 1997, and the related statements of changes in net assets available for plan benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Plan as of December 31, 1998 and 1997, and the changes in net assets available for plan benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets held for investment purposes is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but it supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan's management. The fund information in the statements of net assets available for plan benefits and the statements of changes in net assets available for plan benefits is presented for purposes of additional analysis rather than to present the net assets available for plan benefits and changes in the net assets available for plan benefits of each fund. The supplemental schedule and fund information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole May 21, 1999 EXHIBIT INDEX Electronic Submission Document Exhibit 2 (b)(1) Accountants' Consent

Accountants' Consent The Board of Directors Xerox Corporation We consent to incorporation by reference in the Registration Statements (No. 2-86275 and No. 333-22037) on Form S-8 of Xerox Corporation of our report dated May 21, 1999, relating to the statements of net assets available for plan benefits of The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. as of December 31, 1998 and 1997, and the related statements of changes in net assets available for plan benefits for the year then ended and related schedule, which report appears in the December 31, 1998 Annual Report on Form 11-K of The Profit Sharing Plan of Xerox Corporation and The Xerographic Division, Union of Needletrades, Industrial and Textile Employees, A.F.L. - C.I.O. - C.L.C. Rochester, New York June 29, 1999