By Claudia H. Deutsch

The Xerox Corporation, its finances in chaos and its stock in free fall, plans to spin off a small company today that demonstrates that its technological prowess, at least, remains intact.

The company, Gyricon Media Inc., will make a flexible, paper-thin material that can be used to display computer-generated text.

Xerox expects one of Gyricon's first applications to be in helping create changeable signs for retail stores. For example, during the day, when homemakers are most likely to be shopping, point-of-purchase displays might feature families using a product. When office workers start filing in at night, the store manager would be able to hit a few computer keys and change the display to feature people in suits.

Some investors hail Gyricon's birth as a welcome respite from the unrelenting stream of bad news that has flowed from Xerox lately.

"It demonstrates that they do still have some technology franchise value, and that they can still commercialize a product," said Anthony M. Maramarco, managing director of the David L. Babson Company, an investment company that holds Xerox shares.

David R. Giroux, an investment analyst at T. Rowe Price Associates, a Baltimore money management firm with a small stake in Xerox, sees it that way, too.

"Maybe this can divert investor attention away from the doom and gloom surrounding Xerox," he said. "The market is saying the risk of bankruptcy is greater than the possibility of turnaround, but I think Xerox may still have a big portfolio of technologies and opportunities."

Gyricon's so-called electronic paper is impregnated with tiny balls that are white on one side, black on the other. When hit by a stream of electrons, the balls turn either their white or black face forward. The resulting black-white patterns are similar to the one-two digital patterns of the binary code that computers translate into visible text.

Brian Stern, president of Xerox New Enterprises, which commercializes noncore technologies that come out of the Palo Alto Research Center of Xerox, predicts Gyricon will earn "hundreds of millions in revenues" by 2004, and that Xerox will sell big chunks of equity in the company long before that.

Still, any cash generated would be too little and too late to ease Xerox's financial squeeze. On Friday, Moody's Investors Service downgraded Xerox's debt to junk bond status. The rating activated clauses in Xerox's debt agreements that could force it to buy back or refinance some $425 million in debt. Xerox has only $600 million left in a $7 billion line of credit and, thus, could soon be out of money.

Investors seem to doubt that Xerox, which lost $167 million last quarter, will beat the fast-ticking financial clock. According to First Call/ Thompson Financial, which tracks analysts recommendations on stocks, 10 of the 11 analysts who follow Xerox have "hold" ratings on it -- generally, the worst rating a sell-side analyst will give. Xerox shares, which have plunged precipitously in the last few months, closed at $4.69 yesterday, down 31 cents.

"Most people expected the Moody's downgrade, but the finality of it in the context of a difficult overall credit market caused the stock to decline," said Jack L. Kelly, an analyst with Goldman, Sachs.

Some analysts suggest that arbitragers are selling Xerox equity short and buying bonds, with the idea that if the company goes bankrupt, the short positions will pay off, while bondholders will at least recover something. Several suggested that the stock's depressed price is also leading to year-end tax-loss selling.

Abandoned by investors, Xerox is desperately trying to sell assets. It wants to sell two-thirds of its famed research center, and to get out of the equipment-financing business. The company is expected to sell its China operations to the Fuji Photo Film Company within the next few weeks. Fuji also is said to be interested in buying half of Xerox's 50 percent stake in FujiXerox, their joint venture company in Tokyo. That would leave Xerox with just 25 percent of FujiXerox.

Xerox had expected to announce that sale by now, but some analysts suggest that negotiations may be snagged as Fuji tries to wring concessions from Xerox regarding FujiXerox's right to sell its own products in the United States. Until now, the joint venture had agreed not to compete on Xerox's home turf.

At less than $5 a share, Xerox is vulnerable to buyout firms, who might acquire the company and sell its assets. But analysts say Xerox's huge debt is an effective poison pill.

Many investors have lost patience with Paul A. Allaire, the former chairman that Xerox brought back to lead its turnaround. Several have clamored for an outsider to come in.

Checks with executive recruiters suggest that no active search is going on. While most executives would shy away from a company with such financial problems, recruiters say that some might relish it.

Dayton Ogden, co-chairman of the search firm Spencer Stuart, put it bluntly: "There are turnaround artists out there with big egos who would love to be associated with such a great brand name."

www.nytimes.com