<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                  FORM 10-K/A

                                AMENDMENT NO. 2

                                      TO

                                 ANNUAL REPORT

    PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998

                        Commission file number:  1-8729

                              UNISYS CORPORATION

            (Exact name of registrant as specified in its charter)


             Delaware                                       38-0387840
      (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)


Unisys Way
Blue Bell, Pennsylvania                                       19424
(Address of principal executive offices)                   (Zip Code)


              Registrant's telephone number, including area code:
                                (215) 986-4011

<PAGE>
 
The undersigned registrant hereby amends its annual report on Form 10-K for the
fiscal year ended December 31, 1998 as follows:

(a) Exhibit 13 (portions of the Unisys 1998 Annual Report to Stockholders) is
deleted and is replaced with the attached Exhibit 13. The Unisys 1998 Annual
Report to Stockholders is incorporated by reference into Items 1, 5, 6, 7, 7A, 8
and 14 of the Form 10-K for the year ended December 31, 1998. All references in
such Items to the Unisys 1998 Annual Report to Stockholders shall be deemed to
be references to Exhibit 13 to this Amendment No. 2 on Form 10-K/A.

The attached Exhibit 13 contains revisions made by the company in response to
comments received from the SEC. These revisions consist primarily of (1)
expanded disclosure related to the one-time charges recorded by the company in
the fourth quarter of 1997, (2) reclassifications of certain impairment charges
from "Other income (expense), net" to "Impairment charges," and (3) revisions
made to address SEC comments concerning product warranty costs for company-
manufactured personal computers. With respect to these product warranty costs,
the company has restated its Consolidated Statement of Income for 1997 to remove
the one-time charge to accrue for these costs and has restated prior years to
record the liability on an accrual basis.

The effect on the company's consolidated statements of income is shown in the
following table:


<TABLE>
<CAPTION> 
                                                 Years ended December 31                     
                                         ($ in millions, except per share data)               

                                                        1997                                1996
                                                        ----                                ----
                                                As              As                As                    As    
                                             Reported     Adj.  Restated        Reported      Adj.     Restated 
<S>                                          <C>        <C>    <C>              <C>           <C>     <C>       
Revenue                                      $6,636.0           $6,636.0        $6,370.5               $6,370.5 
                                             ---------         ----------       ---------             ---------
Costs and expenses
Cost of revenue                               4,402.4  $(29.0)   4,373.4         4,252.1      $7.0      4,259.1 
Selling, general and administrative           1,427.2            1,427.2         1,448.1                1,448.1 
Research and development                        302.3              302.3           342.9                  342.9
Impairment charges                              883.6    39.3      922.9         
                                              --------------------------       --------------------------------
                                              7,015.5    10.3    7,025.8         6,043.1       7.0      6,050.1

Operating income (loss)                        (379.5)  (10.3)    (389.8)          327.4      (7.0)       320.4
Interest expense                                233.2              233.2           249.7                  249.7
Other income (expense), net                    (146.1)   39.3     (106.8)           16.0                   16.0
                                              --------------------------       --------------------------------

Income (loss) before income taxes              (758.8)   29.0     (729.8)           93.7      (7.0)        86.7
Estimated income taxes                           94.8     9.9      104.7            31.9      (2.4)        29.5
                                              --------------------------       --------------------------------
Income (loss) before extraordinary item        (853.6)   19.1     (834.5)           61.8      (4.6)        57.2
Extraordinary item                                0.0                0.0           (12.1)                 (12.1)
                                              --------------------------       --------------------------------
Net income (loss)                              (853.6)   19.1     (834.5)           49.7      (4.6)        45.1
Dividends on preferred shares                   111.1              111.1           120.8                  120.8
                                              --------------------------       --------------------------------
Earnings (loss) on common shares              $(964.7)  $19.1    $(945.6)         $(71.1)    $(4.6)      $(75.7)
                                              ==========================       ================================

EPS - basic and diluted 
Before extraordinary item                      $(5.30)  $0.10     $(5.20)         $(0.34)   $(0.03)      $(0.37)
Extraordinary item                                                                 (0.07)                 (0.07)
                                              --------------------------       --------------------------------
Total                                          $(5.30)  $0.10     $(5.20)         $(0.41)   $(0.03)      $(0.44)
                                              ==========================       ================================
</TABLE>


The revisions do not affect cash or cash flow nor do they negatively affect the
company's current or future operations.

The following portions of the Unisys 1998 Annual Report to Stockholders have
been revised to reflect the expanded disclosures, reclassifications, and
revisions:
.    Management's Discussion and Analysis of Financial Condition and Results of
     Operations 

.    Consolidated Statement of Income

.    Consolidated Statement of Cash Flows

.    Consolidated Statement of Stockholders' Equity

.    Notes to Consolidated Financial Statements 

     -    Note 1, Summary of significant accounting policies

     -    Note 2, Earnings per share

     -    Note 3, One-time charges

     -    Note 4, Accounting changes, adjustments and extraordinary item

     -    Note 6, Estimated income taxes

     -    Note 9, Other accrued liabilities

     -    Note 10, Comprehensive income

     -    Note 14, Segment information

     -    Note 15, Employee plans

.    Supplemental Financial Data



(b) Exhibit 12 (Computation of Ratio of Earnings to Fixed Charges) is deleted
and is replaced with the attached Exhibit 12.

(c) Restated Financial Data Schedules for the years ended December 31, 1997 and
1996 are filed as Exhibits 27.1 and 27.2.

<PAGE>
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.



                                               UNISYS CORPORATION

Date:  July 14, 1999                      By:  /s/ Janet Brutschea Haugen
                                               ---------------------------
                                                   Janet Brutschea Haugen
                                               Vice President and Controller

<PAGE>
 
                                 Exhibit Index


Exhibit No.                                      Description
-----------                                      ------------
   12                                  Computation of Ratio of Earnings to
                                       Fixed Charges 

   13                                  Portions of the Annual Report to
                                       Stockholders of the registrant for the
                                       year ended December 31, 1998

   23                                  Consent of Ernst & Young LLP,
                                       Independent Auditors

   27.1                                Restated Financial Data Schedule for the
                                       year ended December 31, 1997

   27.2                                Restated Financial Data Schedule for the
                                       year ended December 31, 1996






<PAGE>
 
                                                                      Exhibit 12

                              UNISYS CORPORATION
         COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
                                ($ in millions)


<TABLE>
<CAPTION>
                                             Years Ended December 31
                                   --------------------------------------------
                                    1998      1997     1996      1995     1994
                                   -------  --------  -------  --------  ------
<S>                                <C>      <C>       <C>      <C>       <C>
Income (loss) from continuing
operations before income taxes     $604.7   $(729.8)  $ 86.7   $(781.1)  $ 14.6
Add (deduct) share of loss
 (income) of associated
 companies                            (.3)      5.9     (4.9)      5.0     16.6
                                   ------   -------   ------   -------   ------
  Subtotal                          604.4    (723.9)    81.8    (776.1)    31.2
                                   ------   -------   ------   -------   ------
Interest expense                    171.7     233.2    249.7     202.1    203.7
Amortization of debt issuance
 expenses                             4.6       6.7      6.3       5.1      6.2
Portion of rental expense
 representative of interest          48.5      51.2     59.2      65.3     65.0
                                   ------   -------   ------   -------   ------
  Total Fixed Charges               224.8     291.1    315.2     272.5    274.9
                                   ------   -------   ------   -------   ------
Earnings (loss) from continuing
 operations before income
 taxes and fixed charges           $829.2   $(432.8)  $397.0   $(503.6)  $306.1
                                   ======   =======   ======   =======   ======
Ratio of earnings to fixed
 charges                             3.69   *           1.26   *           1.11
                                   ======   =======   ======   =======   ======
</TABLE>


* Earnings for the years ended December 31, 1997 and 1995 were inadequate to
cover fixed charges by approximately $723.9 and $776.1 million, respectively.

                                                                      





<PAGE>
 
                                                                      EXHIBIT 13

Unisys Corporation


Management's Discussion and Analysis of 
Financial Condition and Results of Operations

Results of operations

     For 1998, the company reported net income of $387.0 million, or $1.06 per
diluted common share, compared to net income, before one-time charges, of $194.8
million, or $.44 per diluted common share, for 1997. In 1996, income before an
extraordinary item was $57.2 million, or a loss of $.37 per common share.

     In the fourth quarter of 1997, the company undertook a strategic review of
its worldwide operations. The results of this review suggested the need for
further transformation of the company's operations to ensure the continued
emphasis on investment in services growth, the transition of its enterprise
class servers to a truly open architecture, and aggressive debt reduction
initiatives. This review and the resulting recommendations were finalized in
December 1997. These recommendations included the discontinuance of PC and low-
end server manufacturing and the disposal of a small, non-strategic technology
product in view of the continued inefficiencies of these operations and in order
to allow management to focus on the company's core competencies. Additionally,

in late 1997, the company announced a strategic partnership with Microsoft to
integrate Windows NT with enterprise computing. These changes in strategic
direction, together with the continuing trends toward common platforms and
commodity components, market shifts from higher-profit margin proprietary
systems to lower-margin open systems and continued declines in core maintenance
revenues, represented indicators of a potential impairment, which caused the
company to undertake an in-depth assessment of the recoverability of the
goodwill related to the 1986 Sperry Corporation acquisition. This review
indicated a continuation of the trend of declining revenue from Sperry-related
proprietary products and maintenance. However, this revenue decline is expected
to be more than offset by increased revenue from open systems products and
maintenance, and the company's aggressive expansion of services related revenue.
Therefore, the company does not expect that the decline in Sperry-related
revenue will have a material adverse effect on the company's consolidated
results of operations or liquidity.

     In the fourth quarter of 1997, as a result of the strategic review
discussed above, the company recorded a one-time charge of $1.0 billion against
net income. Including this charge, the company had a 1997 net loss of $834.5
million or $5.20 per share.

     The $1.0 billion charge included $103.7 million, or $0.58 per share,
principally related to the company's decisions to discontinue the manufacturing
and assembly of personal computers and low-end servers and outsource the
procurement of these products, and to dispose of a small, non-strategic
technology product. In March 1998, the company announced that it had reached a
PC outsourcing agreement with a third party to build notebooks, desktops, and
entry-level servers for the company's customers. As a result, the company ceased
manufacturing and assembly of these products in September 1998. In July 1998,
the company completed the sale of the operations relating to the non-strategic
technology product.

     Also included in the charge is the non-cash write-off of $883.6 million, or
$4.85 per share, of goodwill principally related to the 1986 merger of Burroughs
Corporation and Sperry Corporation. The write-off reflects the rapid changes
that continue to occur in the marketplace away from the proprietary technology
and maintenance businesses and the continuing declines in revenue and margins in
these businesses, as well as the company's decision to change the method used
for measuring the remaining value of goodwill. Yearly amortization of this
goodwill was approximately $36 million.

     The final component of the fourth-quarter charge was $42.0 million, or $.23
per share, related to the conversion of convertible debt. During the fourth
quarter of 1997, the company reduced its long-term debt by $616 million through
the conversion of convertible notes into 73.2 million shares of common stock.
Approximately $271 million of the debt was converted in response to a special
offer by the company to pay a cash premium for each note converted. The $42.0
million charge represents the cost of the special offer.

     The following comparisons of income statement categories exclude the one-
time charges discussed above.

     Revenue for 1998 was $7.2 billion compared to $6.6 billion in 1997 and $6.4
billion in 1996. Revenue from international operations in 1998, 1997, and 1996
was $4.1 billion, $3.9 billion, and $4.0 billion, respectively. Revenue from
U.S. operations was $3.1 billion in 1998, $2.7 billion in 1997, and $2.4 billion
in 1996.

     Total gross profit percent was 34.0% in 1998, 35.0% in 1997, and 33.1% in
1996. The decrease in 1998 reflects the company's shift to higher-growth,
lower-margin services businesses.

     Selling, general and administrative expenses in 1998 were $1.3 billion
compared to $1.4 billion in both 1997 and 1996. The decline in 1998 was largely
due to the company's cost reduction programs, as well as stringent controls over
all discretionary expenditures.

     Research and development expenses in 1998 were $296.6 million compared to
$297.4 million in 1997 and $342.9 million in 1996. The decline in 1997 compared
to 1996 was largely due to the company's cost reduction actions. 

     In 1998, the company reported operating income of $810.2 million (11.2% of
revenue) compared to $607.4 million (9.2% of revenue) in 1997 and $320.4 million
(5.0% of revenue) in 1996.

     In 1998, the company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related
Information." See Note 14 of the Notes to the Consolidated Financial Statements.
Prior to its adoption, the company reported information on its Information
Services, Global Customer Services and Computer Systems business units. For the
most part, the company now combines the Information Services and Global Customer
Services businesses into a segment called Services, and now reports the Computer
Systems business under the Technology segment.

                                      30

<PAGE>
 
     Information by these business segments for 1998, 1997, and 1996 is
presented below:


<TABLE>
<CAPTION>

(Millions of dollars)                                 Total           Eliminations         Services          Technology
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>                <C>               <C>
1998
------------------------------
Customer revenue                                    $  7,208.4                            $  4,909.3        $   2,299.1
Intersegment                                                           $   (511.2)              73.7              437.5
                                                   ----------------------------------------------------------------------
Total revenue                                       $  7,208.4         $   (511.2)        $  4,983.0        $   2,736.6
                                                   ----------------------------------------------------------------------
Gross profit percent                                      34.0%                                 24.2%              46.9%
Operating income percent                                  11.2%                                  6.9%              18.7%

1997
------------------------------
Customer revenue                                    $  6,636.0                            $  4,281.0        $   2,355.0
Intersegment                                                           $   (483.8)              70.0              413.8
                                                   ----------------------------------------------------------------------
Total revenue                                       $  6,636.0         $   (483.8)        $  4,351.0        $   2,768.8
                                                   ----------------------------------------------------------------------
Gross profit percent                                      35.0%                                 24.2%              46.2%
Operating income percent                                   9.2%                                  3.8%              16.0%

1996
------------------------------
Customer revenue                                    $  6,370.5                            $  4,008.8        $   2,361.7
Intersegment                                                           $   (529.3)              82.1              447.2
                                                   ----------------------------------------------------------------------
Total revenue                                       $  6,370.5         $   (529.3)        $  4,090.9        $   2,808.9
                                                   ----------------------------------------------------------------------
Gross profit percent                                      33.1%                                 24.0%              41.5%
Operating income percent                                   5.0%                                  3.0%               8.9%

-------------------------------------------------------------------------------------------------------------------------
Gross profit percent and operating income percent are as a percent of total revenue.
</TABLE>


     In the Services segment, customer revenue was $4.9 billion in 1998, $4.3
billion in 1997, and $4.0 billion in 1996. The growth in customer revenue was
15% in 1998 and 7% in 1997 led by increases in network services, systems
integration, and outsourcing revenue. In both years, these increases more than
offset the decline in proprietary maintenance revenue. Gross profit, although
relatively constant, reflects benefits from improvements in bid quality and
control processes and from completion of certain problem contracts, offset by:
(a) heavy competition in the network services market, (b) commoditization of
low-end, third-party hardware components that are typically part of a network
integration project, (c) continued roll out of a large low-margin federal
government networking project, and (d) continued shift in mix away from
proprietary maintenance. Operating profit in the segment was 6.9% in 1998, 3.8%
in 1997, and 3.0% in 1996. The increases in operating profit were largely due to
cost reduction programs as well as stringent cost controls over all
discretionary expenditures.

     In the Technology segment, customer revenue was $2.3 billion in 1998 and
$2.4 billion in both 1997 and 1996. In 1998, revenue for ClearPath enterprise
servers remained strong, which offset declines, as expected, in personal
computer revenue. Earlier in 1998, the company outsourced the supply of
notebooks, PCs, and entry-level servers to focus on its more profitable
enterprise server business. The gross profit percent was 46.9% in 1998, 46.2% in
1997, and 41.5% in 1996. The increases in gross profit percent were due in large
part to a richer mix of enterprise servers and enterprise server software sales.
Operating profit in this segment was 18.7% in 1998, 16.0% in 1997, and 8.9% in
1996. The increases in operating profit, above the respective increases in gross
profit, were largely due to cost reduction programs as well as stringent
controls over all discretionary expenditures.

                                      31

<PAGE>
 
     Interest expense was $171.7 million in 1998, $233.2 million in 1997, and
$249.7 million in 1996. The declines were due to lower average debt levels.

     Other income (expense), net, which can vary from year to year, was an
expense of $33.8 million in 1998 and $64.8 million in 1997, and income of $16.0
million in 1996. The difference in 1998 compared to 1997 was principally due to
lower goodwill amortization and higher equity income. In addition in 1998, a net
gain on the sale of properties was offset by charges related to certain legal
disputes and the early extinguishment of debt. The difference in 1997 compared
to 1996 was principally due to lower interest and equity income in 1997 and a
gain on the sale of an equity investment in 1996.

     Income before income taxes in 1998 was $604.7 million compared to $309.4
million in 1997 and $86.7 million in 1996.

     Estimated income taxes in 1998 were $217.7 million compared to $114.6
million in 1997 and $29.5 million in 1996. The 1996 tax provision included a
benefit of $24.8 million related to reversals of deferred tax valuation
allowances due to additional tax planning strategies available to the company.

     Effective January 1, 1998, the company changed the functional currency of
its Brazilian operations from the U.S. dollar to the Brazilian local currency
because the Brazilian economy was no longer considered highly inflationary. This
change did not have a material effect on the company's consolidated financial
position, consolidated results of operations, or liquidity. 

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for the year beginning January 1, 2000, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management is evaluating the impact this
statement may have on the company's financial statements.


Financial condition

Cash and cash equivalents at December 31, 1998 were $604.3 million compared to
$803.0 million at December 31, 1997. 

     During 1998, cash provided by operations was $650.0 million compared to
$383.5 million in 1997. This increase was due in large part to higher net income
and improved working capital management, including improvements in inventory
turns. Operational cash flow in both years was reduced by a decline in sales of
accounts receivable. In October 1998, the company terminated its $120 million
U.S. facility used to sell accounts receivable. In 1997, the company reduced
sales of accounts receivables, principally outside the United States, by $151
million. Cash expenditures related to prior-year restructuring actions (which
are included in operating activities) in 1998, 1997, and 1996 were $118.4
million, $178.7 million, and $220.8 million, respectively. Cash expenditures for
restructuring actions, principally for work-force reductions and facility costs,
are expected to be approximately $67 million in 1999 and $35 million thereafter.
Personnel reductions in 1998 related to restructuring actions were approximately
900 and are expected to be approximately 450 thereafter, principally in 
1999.

                                      32

<PAGE>
 
     Cash used for investing activities during 1998 was $275.0 million compared
to $291.6 million for 1997.

     Cash used for financing activities during 1998 was $570.7 million compared
to $274.1 million in 1997. Included in 1998 were payments of debt of $748.5
million (described below) partially offset by proceeds of $195.2 million from
issuance of 7 7/8% senior notes due 2008. In 1997, the company redeemed all
$150.0 million of its Series B and C Cumulative Convertible Preferred Stock and
spent $46.1 million in connection with the conversions of debt into common stock
described below. Dividends paid on preferred stock were $106.5 million in 1998
compared to $113.1 million in 1997.

     At December 31, 1998, total debt was $1.2 billion, a decline of $532.2
million from December 31, 1997. Debt retirements during 1998 were as follows. On
February 5, 1998, the company redeemed all $197.5 million of its 9 1/2% senior
notes due on July 15, 1998. On March 2, 1998, the company redeemed $200 million
principal amount of its 10 5/8% senior notes due 1999. On September 15, 1998,
the company made a $30 million sinking fund payment, which included a $20
million optional prepayment, on its 9 3/4% sinking fund debentures. On October
1, 1998, the company redeemed at par the remaining $130 million outstanding of
its 10 5/8% notes, one year ahead of the due date in October 1999. On December
4, 1998, the company redeemed the remaining $160.0 million of its 9 3/4% sinking
fund debentures at the stated redemption price of 103.61% of principal. 

     In the fourth quarter of 1997, $616.2 million of the company's convertible
subordinated notes were converted into 73.2 million shares of common stock.
These conversions included all $345.0 million of the company's 8 1/4%
convertible subordinated notes due 2000 and $271.2 million of its 8 1/4%
convertible subordinated notes due 2006. 

     In December 1998, the company called 2.0 million shares of its Series A
Cumulative Convertible Preferred Stock for redemption on January 21, 1999. The
preferred stock is convertible into shares of the company's common stock, at the
option of the holder, at a conversion rate of approximately 1.67 shares of
common stock for each preferred share converted. 

     On January 21, 1999, 1.9 million shares of the preferred stock were
converted into 3.2 million shares of the company's common stock and 270 thousand
shares of preferred stock were redeemed for $13.5 million. Included in the above
number were 184 thousand shares of preferred stock that were voluntarily
converted into the company's common stock during the call period. 

     In addition, on January 21, 1999, the company announced that it was calling
for redemption on March 4, 1999, an additional 6.0 million shares of its
preferred stock. This call, when combined with the January 21, 1999 conversions
and redemptions, will save $30.7 million of annual dividend payments and will be
accretive to 1999 diluted earnings per common share. 

     In January 1999, the company called for redemption on March 15, 1999, the
remaining $27 million of its 8 1/4% convertible subordinated notes due 2006. The
notes will be redeemed at 105.775% of par, plus accrued interest. Each note is
convertible into approximately 145.45 shares of the company's common stock. 

     The company may, from time to time, continue to redeem, tender for, or
repurchase its securities in the open market or in privately negotiated
transactions depending upon availability, market conditions, and other factors.

                                      33

<PAGE>
 
     The company has on file with the Securities and Exchange Commission an
effective registration statement covering $700 million of debt or equity
securities, which enables the company to be prepared for future market
opportunities.

     In June 1998, the company entered into a $400 million, three-year credit
agreement. The new facility replaced the company's more restrictive $200 million
credit agreement established in June 1997. As of December 31, 1998, there were
no borrowings under the agreement. 

     In May 1998, Moody's Investor Services raised its credit rating on the
company's senior long-term debt to Ba3 from B1. In June 1998, Standard & Poor's
Corporation raised its credit rating on the company's senior long-term debt to
BB- from B+. In February 1999, Duff & Phelps Credit Rating Co. increased its
rating on the company's senior long-term debt to BB+ from BB. 

     At December 31, 1998, the company had deferred tax assets in excess of
deferred tax liabilities of $1,384 million. For the reasons cited below,
management determined that it is more likely than not that $1,061 million of
such assets will be realized, therefore resulting in a valuation allowance of
$323 million. 

     The company evaluates quarterly the realizability of its net deferred tax
assets by assessing its valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are the company's forecast of future taxable income, which is
adjusted by applying probability factors, and available tax planning strategies
that could be implemented to realize deferred tax assets. Failure to achieve
forecasted taxable income might affect the ultimate realization of the net
deferred tax assets. See "Factors that may affect future results" below. The
combination of these factors is expected to be sufficient to realize the entire
amount of net deferred tax assets. Approximately $3.2 billion of future taxable
income (predominantly U.S.) is needed to realize all of the net deferred tax
assets. 

     Stockholders' equity increased $311.1 million during 1998, principally
reflecting net income of $387.0 million, proceeds from the issuance of stock
under stock option and other plans of $89.7 million, and $30.6 million of tax
benefits related to stock plans, offset in part by preferred stock dividends of
$106.5 million and translation adjustments of $83.5 million.


Market risk disclosure

The company has exposure to interest rate risk from its short-term and long-term
debt. In general, the company's long-term debt is fixed rate and the short-term
debt is variable rate. See Note 8 of the Notes to Consolidated Financial
Statements for components of the company's long-term debt. 

     The company is also exposed to foreign currency exchange rate risks. The
company uses derivative financial instruments to reduce its exposure to market
risks from changes in foreign currency exchange rates. The derivative
instruments used are foreign exchange forward contracts and options. These
derivatives, which are over-the-counter instruments, are non-leveraged and
involve little complexity. The company does not hold or issue derivatives for
speculative trading purposes. See Note 12 of the Notes to Consolidated Financial
Statements for additional information on the company's derivative financial
instruments.

     The company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign currency exchange rates and interest rates
applied to the hedging contracts and debt instruments described above. As of
December 31, 1998, the analysis indicated that such market movements would not
have had a material effect on the company's consolidated results of operations
or on the fair value of its risk-sensitive financial instruments. Based on
changes in the timing and amount of interest rate and foreign currency exchange
rate movements and the company's portfolio of risk-sensitive financial
instruments, actual effects on operations in the future may differ materially
from that analysis.

                                      34

<PAGE>
 
Year 2000 readiness disclosure

Many computer systems and embedded technology may experience problems handling
dates beyond the year 1999 and therefore may need to be modified prior to the
year 2000 in order to remain functional. The company is taking steps to ensure
both the readiness of its product offerings to customers and the readiness of
its internal systems for handling dates beginning in the year 2000.

     As part of its development efforts, the company's current product offerings
have been designed or are being redesigned to be year 2000 ready, as defined by
the company. However, certain of the company's hardware and software products
currently used by customers will require upgrades or other remediation to become
year 2000 ready. Some of these products are used in critical applications where
the impact of non-performance to these customers and other parties could be
significant. The company has taken steps to notify customers of the year 2000
issue, provide information and resources on the company's year 2000 web site,
emphasize the importance of customer testing of their own systems in their own
unique business environment and offer consulting services to assist customers in
assessing their year 2000 risk. 

     The company is also in the process of assessing the year 2000 readiness of
its key suppliers. The company's reliance on suppliers, and therefore, on the
proper functioning of their products, information systems, and software, means
that their failure to address year 2000 issues could affect the company's
business. However, the potential impact and related costs are not known at this
time. The company is in the process of inquiring about the year 2000 readiness
of key suppliers providing services to the company. It is also in the process of
trying to obtain year 2000 readiness warranties from key vendors supplying
product to the company for incorporation into the company's products for resale.
The company expects to identify alternate sources or strategies where necessary
if significant exposure is identified.

     The company's year 2000 internal systems effort involves three stages:
inventory and assessment of its hardware, software and embedded systems,
remediation or replacement of those that are not year 2000 ready, and testing
the systems. In 1997, the company completed an inventory and year 2000
assessment of its internal information technology ("IT") systems, and developed
a work plan to remediate non-compliant systems or replace or consolidate these
systems as part of the company's efforts to reduce and simplify, on a worldwide
basis, its IT systems.

     The company is initially focusing on the IT systems that are critical to
running its business. The company expects to complete the remediation or
replacement/consolidation of such systems by March 1999 and to complete
integrated testing of these systems by mid 1999. The company expects to
remediate or replace/consolidate its other IT systems by mid 1999 and to test
these systems throughout 1999. 

     The company has completed an inventory and assessment of its key non-IT
systems, such as data and voice communications, building management, and
manufacturing systems. The company is in the process of remediating those
systems that are not year 2000 ready and expects to have such remediation and
testing completed by mid 1999. 

     The company estimates that, as of December 31, 1998, the cost of
remediating its internal systems has been approximately $12 million, and it
expects to spend approximately $3 million in 1999. The company is funding this
effort through normal working capital. This estimate does not include the cost
of replacing or consolidating IT systems in connection with the company's
worldwide IT simplification project, which was undertaken for reasons unrelated
to year 2000 issues, potential costs related to any customer or other claims,
the costs associated with making the company's product offerings year 2000
ready, and the costs of any disruptions caused by suppliers not being year 2000
ready. This estimate is based on a current assessment of the year 2000 projects
and is subject to change as the projects progress.

                                      35

<PAGE>
 
     Although the company does not believe that it will incur material costs or
experience material disruptions in its business associated with the year 2000,
there can be no assurance that the company will not experience serious
unanticipated negative consequences and/or material costs. The company may see
increased customer satisfaction costs related to year 2000 over the next few
years. In addition, some commentators have stated that a significant amount of
litigation may arise out of year 2000 compliance issues, and the company is
aware of a growing number of lawsuits against information technology and
solutions providers. Although the company believes it has taken adequate
measures to address year 2000 issues, because of the unprecedented nature of
such litigation, it is uncertain to what extent the company may be affected by
it. It is also unknown whether customer spending patterns may be impacted by the
year 2000 issue. Efforts by customers to address year 2000 issues may absorb a
substantial part of their IT budgets in the near term, and customers may either
accelerate or delay the purchase of new applications and systems. While this
behavior may increase demand for certain of the company's products and services,
including its year 2000 offerings, it could also soften demand. These events
could affect the company's revenues or change its revenue patterns. In addition,
there can be no assurance that the company's current product offerings do not
contain undetected errors or defects associated with year 2000 date functions
that may result in increased costs to the company. With respect to its internal
systems, the worst case scenarios might include corruption of data contained in
the company's internal IT systems, hardware failures, the failure of the
company's significant suppliers, and the failure of infrastructure services
provided by utilities and other third parties such as electricity, phone
service, water transport and internet services.

     The company is in the initial stages of developing contingency plans in the
event it does not complete all phases of its year 2000 program. The company
plans to evaluate the status of completion of its year 2000 program in the
second quarter of 1999 and to begin implementing such plans as it deems
necessary.


Conversion to the euro currency

On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (the "euro"). The transition period for the introduction
of the euro began on January 1, 1999. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and coins for use
in cash transactions. No later than July 1, 2002, the participating countries
will withdraw all bills and coins denominated in the legacy currencies, so that
the legacy currencies no longer will be legal tender for any transactions,
making the conversion to the euro complete.

     The company is addressing the issues involved with the introduction of the
euro. The more important issues facing the company include converting
information technology systems, reassessing currency risk, and negotiating and
amending agreements. Based on progress to date, the company believes that the
use of the euro will not have a significant impact on the manner in which it
conducts its business. Accordingly, conversion to the euro is not expected to
have a material effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.

                                      36

<PAGE>
 
Factors that may affect future results

From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties, and other factors that could cause the company's actual results
to differ materially from expectations. In addition to changes in general
economic and business conditions and natural disasters, these include, but are
not limited to, the factors discussed below.

     The company operates in an industry characterized by aggressive
competition, rapid technological change, evolving technology standards, and
short product life cycles. 

     Future operating results will depend on the company's ability to design,
develop, introduce, deliver, or obtain new products and services on a timely and
cost-effective basis; on its ability to mitigate the effects of competitive
pressures and volatility in the information services and technology industry on
revenues, pricing, and margins; on its ability to effectively manage the shift
of its business mix away from traditional high-margin product and services
offerings; and on its ability to successfully attract and retain highly skilled
people.

     Certain of the company's systems integration contracts are fixed-price
contracts under which the company assumes the risk for delivery of the
contracted services at an agreed-upon price. Future results will depend on the
company's ability to profitably perform these services contracts and bid and
obtain new contracts. 

     Approximately 57% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, and import or export licensing requirements. 

     In the course of providing complex, integrated solutions to customers, the
company frequently forms alliances with third parties that have complementary
products, services, or skills. Future results will depend in part on the
performance and capabilities of these third parties, including their ability to
deal effectively with the year 2000 issue. Future results will also depend upon
the ability of external suppliers to deliver components at reasonable prices and
in a timely manner and on the financial condition of and the company's
relationship with distributors and other indirect channel partners. 

     Future results may also be adversely affected by a delay in, or increased
costs associated with, the implementation of the year 2000 actions discussed
above, or by the company's inability to implement them.

                                      37

<PAGE>
 
Unisys Corporation
Consolidated Financial Statements

Consolidated Statement of Income


<TABLE>
<CAPTION>

Year Ended December 31 (Millions, except per share data)            1998              1997               1996
---------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                <C>
Revenue                                                          $7,208.4           $6,636.0           $6,370.5
                                                                -----------------------------------------------
Costs and expenses
Cost of revenue                                                   4,758.6            4,373.4            4,259.1
Selling, general and administrative expenses                      1,343.0            1,427.2            1,448.1
Research and development expenses                                   296.6              302.3              342.9
Impairment charges                                                                     922.9
                                                                -----------------------------------------------
                                                                  6,398.2            7,025.8            6,050.1
                                                                -----------------------------------------------
Operating income (loss)                                             810.2             (389.8)             320.4
Interest expense                                                    171.7              233.2              249.7
Other income (expense), net                                         (33.8)            (106.8)              16.0
                                                                -----------------------------------------------
Income (loss) before income taxes                                   604.7             (729.8)              86.7
Estimated income taxes                                              217.7              104.7               29.5
                                                                -----------------------------------------------
Income (loss) before extraordinary item                             387.0             (834.5)              57.2
Extraordinary item                                                                                        (12.1)
                                                                -----------------------------------------------
Net income (loss)                                                   387.0             (834.5)              45.1
Dividends on preferred shares                                       106.5              111.1              120.8
                                                                -----------------------------------------------
Earnings (loss) on common shares                                 $  280.5           $ (945.6)          $  (75.7)
                                                                -----------------------------------------------
Earnings (loss) per common share - basic
Before extraordinary item                                        $   1.11           $  (5.20)          $   (.37)
Extraordinary item                                                                                         (.07)
                                                                -----------------------------------------------
Total                                                            $   1.11           $  (5.20)          $   (.44)
                                                                -----------------------------------------------
Earnings (loss) per common share - diluted
Before extraordinary item                                        $   1.06           $  (5.20)          $   (.37)
Extraordinary item                                                                                         (.07)
                                                                -----------------------------------------------
Total                                                            $   1.06           $  (5.20)          $   (.44)
---------------------------------------------------------------------------------------------------------------
</TABLE>


See notes to consolidated financial statements.

                                      38

<PAGE>
 
Unisys Corporation

Consolidated Balance Sheet


<TABLE> 
<CAPTION> 

December 31 (Millions)                                                                     1998               1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                <C>  
Assets
Current assets
Cash and cash equivalents                                                              $    604.3         $    803.0
Accounts and notes receivable, net                                                        1,232.0              967.3
Inventories                                                                                 463.3              560.8
Deferred income taxes                                                                       428.8              461.4
Other current assets                                                                         88.3               94.0
                                                                                       ------------------------------ 
Total                                                                                     2,816.7            2,886.5
                                                                                       ------------------------------ 
Properties                                                                                1,720.5            1,774.1
Less - Accumulated depreciation                                                           1,139.6            1,192.9
                                                                                       ------------------------------ 
Properties, net                                                                             580.9              581.2
                                                                                       ------------------------------ 
Investments at equity                                                                       184.6              215.7
                                                                                       ------------------------------ 
Software, net of accumulated amortization                                                   246.6              259.0
                                                                                       ------------------------------ 
Prepaid pension cost                                                                        833.8              762.4
                                                                                       ------------------------------ 
Deferred income taxes                                                                       694.4              665.7
                                                                                       ------------------------------ 
Other assets                                                                                220.7              220.8
                                                                                       ------------------------------ 
Total                                                                                  $  5,577.7         $  5,591.3
                                                                                       ------------------------------ 

Liabilities and stockholders' equity
Current liabilities
Notes payable                                                                          $     50.6         $     40.6

Current maturities of long-term debt                                                          4.0              213.1
Accounts payable                                                                            922.7              817.1
Other accrued liabilities                                                                 1,301.9            1,307.2
Dividends payable                                                                            26.6               26.6
Estimated income taxes                                                                      276.7              172.8
                                                                                       ------------------------------ 
Total                                                                                     2,582.5            2,577.4
                                                                                       ------------------------------ 
Long-term debt                                                                            1,105.2            1,438.3
                                                                                       ------------------------------ 
Other liabilities                                                                           373.0              369.7
                                                                                       ------------------------------ 
Stockholders' equity
Preferred stock                                                                           1,420.0            1,420.1
Common stock, shares issued: 1998 - 257.9; 1997 - 250.2                                       2.6                2.5
Accumulated deficit                                                                      (1,456.3)          (1,736.8)
Other capital                                                                             2,082.3            1,968.2
Accumulated other comprehensive loss                                                       (531.6)            (448.1)
                                                                                       ------------------------------ 
Stockholders' equity                                                                      1,517.0            1,205.9
                                                                                       ------------------------------ 
Total                                                                                  $  5,577.7         $  5,591.3
---------------------------------------------------------------------------------------------------------------------
</TABLE>
 
See notes to consolidated financial statements.

                                      39

<PAGE>
 
Unisys Corporation

Consolidated Statement of Cash Flows


<TABLE> 
<CAPTION> 
Year Ended December 31 (Millions)                                                      1998           1997          1996
<S>                                                                                <C>            <C>            <C> 
Cash flows from operating activities
Income (loss) before extraordinary item                                            $    387.0     $   (834.5)    $     57.2
Add (deduct) items to reconcile income (loss) before
  extraordinary item to net cash provided by
  (used for) operating activities:
Effect of extraordinary item                                                                                          (12.1)
Depreciation                                                                            145.7          156.0          182.0
Amortization:
  Marketable software                                                                   111.8           97.0          101.6
  Goodwill                                                                                8.9          963.9           46.1
(Increase) in deferred income taxes, net                                                (26.8)         (25.3)         (51.0)
(Increase) decrease in receivables, net                                                (276.1)          24.0           11.0
Decrease in inventories                                                                  98.2           81.5           32.1
Increase (decrease) in accounts payable and other accrued liabilities                   100.5         (235.1)        (254.9)
Increase (decrease) in estimated income taxes                                           148.0           32.9          (37.1)
Increase (decrease) in other liabilities                                                 11.8          (85.6)         (82.4)
(Increase) decrease in other assets                                                     (57.3)         106.5          (70.3)
Other                                                                                    (1.7)         102.2          (11.9)
                                                                                   ----------------------------------------        
Net cash provided by (used for) operating activities                                    650.0          383.5          (89.7)
                                                                                   ----------------------------------------
Cash flows from investing activities
Proceeds from investments                                                             1,991.0        1,662.5        1,846.1
Purchases of investments                                                             (2,006.5)      (1,629.0)      (1,845.9)
Proceeds from sales of properties                                                        51.1            5.1           77.4
Investment in marketable software                                                       (99.4)        (132.9)        (116.2)
Capital additions of properties                                                        (207.3)        (179.9)        (162.3)
Purchases of businesses                                                                  (3.9)         (22.2)         (17.9)
Proceeds from marketable securities                                                                      4.8
                                                                                   ----------------------------------------
Net cash used for investing activities                                                 (275.0)        (291.6)        (218.8)
                                                                                   ----------------------------------------
Cash flows from financing activities
Proceeds from issuance of long-term debt                                                195.2                       1,139.7
Payments of long-term debt                                                             (748.5)                       (766.4)
Net proceeds from (reduction in) short-term borrowings                                   10.0           26.7           (1.9)
Dividends paid on preferred shares                                                     (106.5)        (113.1)        (120.8)
Proceeds from employee stock plans                                                       79.1            8.4             .6
Redemption of redeemable preferred stock                                                              (150.0)
Costs of debt conversions                                                                              (46.1)
                                                                                   ----------------------------------------
Net cash (used for) provided by financing activities                                   (570.7)        (274.1)         251.2
                                                                                   ----------------------------------------
Effect of exchange rate changes on cash and cash equivalents                             (3.0)         (24.9)          (7.3)
                                                                                   ----------------------------------------
Net cash used for continuing operations                                                (198.7)        (207.1)         (64.6)
                                                                                   ----------------------------------------
Net cash used for discontinued operations                                                              (19.1)         (20.5)
                                                                                   ----------------------------------------
Decrease in cash and cash equivalents                                                  (198.7)        (226.2)         (85.1)
                                                                                   ----------------------------------------
Cash and cash equivalents, beginning of year                                            803.0        1,029.2        1,114.3
                                                                                   ----------------------------------------
Cash and cash equivalents, end of year                                             $    604.3     $    803.0     $  1,029.2
                                                                                   ----------------------------------------        
See notes to consolidated financial statements.
</TABLE>
 

                                      40

<PAGE>
 
Unisys Corporation



Consolidated Statement of Stockholders' Equity


<TABLE> 
<CAPTION> 
                                                                                               Other,   Accumulated     
                                                                                            Principally    Other       Comprehensive
                                          Preferred     Common     Accumulated   Treasury     Paid-In  Comprehensive      Income
(Millions)                                  Stock        Stock       Deficit      Stock       Capital  Income (Loss)*     (Loss)
<S>                                      <C>           <C>         <C>           <C>        <C>        <C>             <C> 
Balance at December 31, 1995             $  1,570.3    $    1.7    $   (717.1)   $ (16.3)   $  1,346.3   $ (339.2)
Transfer to "redeemable
  preferred stock"                           (150.0)
Issuance of stock under stock
  option and other plans                                     .1                                   23.6
Net income                                                               45.1                                            $   45.1
Other comprehensive income -
  translation adjustments                                                                                   (50.9)          (50.9)
                                                                                                                         --------
Comprehensive loss                                                                                                       $   (5.8)
                                                                                                                         --------
Dividends                                                              (117.2)
Unearned compensation                                                                             (9.4)
Other                                           (.1)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                1,420.2         1.8        (789.2)     (16.3)      1,360.5     (390.1)
Conversions to common stock                     (.1)         .7                                  606.0
Issuance of stock under stock
  option and other plans                                                             4.0           8.4
Net loss                                                               (834.5)                                           $ (834.5)
Other comprehensive income -
  translation adjustments                                                                                   (58.0)          (58.0)
                                                                                                                         --------
Comprehensive loss                                                                                                       $ (892.5)
                                                                                                                         --------
Dividends                                                              (113.1)
Unearned compensation                                                                              3.0
Tax benefit related to stock plans                                                                 1.5
Other                                                                                 .1           1.0
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                1,420.1         2.5      (1,736.8)     (12.2)      1,980.4     (448.1)
Conversions to common stock                     (.1)                                                .5
Issuance of stock under stock
  option and other plans                                     .1                    (11.4)         89.6
Net income                                                              387.0                                            $  387.0
Other comprehensive income -
  translation adjustments                                                                                   (83.5)          (83.5)
                                                                                                                         --------
Comprehensive income                                                                                                     $  303.5
                                                                                                                         --------
Dividends                                                              (106.5)
Unearned compensation                                                                              4.8
Tax benefit related to stock plans                                                                30.6
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998             $  1,420.0    $    2.6    $ (1,456.3)   $ (23.6)     $2,105.9   $ (531.6)         
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
 

*    Entire amount relates to foreign currency translation adjustments. 
     See notes to consolidated financial statements.

                                      41

<PAGE>
 
Unisys Corporation

Notes to Consolidated Financial Statements


1 Summary of significant accounting policies

Principles of consolidation. The consolidated financial statements include the
accounts of all majority-owned subsidiaries. Investments in companies
representing ownership interests of 20% to 50% are accounted for by the equity
method.

Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash equivalents. All short-term investments purchased with a maturity of three
months or less are classified as cash equivalents.

Inventories. Inventories are valued at the lower of cost or market. Cost is
determined principally on the first-in, first-out method.

Properties and depreciation. Properties are carried at cost and are depreciated
over the estimated lives of such assets using the straight-line method.
Outsourcing equipment is depreciated over the shorter of the asset lives or the
terms of the contract. For other classifications of properties, the principal
rates used are summarized below:

                                   Rate per Year (%)
                                   -----------------
    Buildings                              2-5
    Machinery and office equipment         5-25
    Rental equipment                       25

Revenue recognition. Sales revenue is recorded upon shipment of product in the
case of sales contracts and upon installation in the case of sales-type leases.
Revenue from equipment maintenance is recorded as earned over the lives of the
respective contracts. Revenue from software licenses is recorded when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. Revenue for post-contract software
support arrangements, which are marketed separately, is recorded over the
support period or as the contract elements are delivered.
     
     Revenue under systems integration and services contracts is recognized on
the basis of the estimated percentage of completion of services rendered or when
services have been performed and accepted, depending on the nature of the
project. 

     Accounting for large multi-year, fixed-price systems integration contracts
involves considerable use of estimates in determining revenue, costs, and
profits. When estimates indicate a loss under a contract, cost of revenue is
charged with a provision for such loss. Revisions in profit estimates are
reflected in the period in which the facts that give rise to the revision become
known. 

Income taxes. Income taxes are provided on taxable income at the statutory rates
applicable to such income. Deferred taxes have not been provided on the
cumulative undistributed earnings of foreign subsidiaries because such amounts
are expected to be reinvested indefinitely.

Marketable software. The cost of development of computer software to be sold or
leased is capitalized and amortized to cost of sales over the estimated
revenue-producing lives of the products, but not in excess of three years
following product release.

                                      42

<PAGE>
 
Translation of foreign currency.  The local currency is the functional currency
for most of the company's international subsidiaries and, as such, assets and
liabilities are translated into U.S. dollars at year-end exchange rates. Income
and expense items are translated at average exchange rates during the year.
Translation adjustments resulting from changes in exchange rates are reported in
other comprehensive income. Exchange gains and losses on intercompany balances
of a long-term investment nature are also reported in other comprehensive
income.

     For those international subsidiaries operating in hyper-inflationary
economies, the U.S. dollar is the functional currency and, as such, non-monetary
assets and liabilities are translated at historical exchange rates and monetary
assets and liabilities are translated at current exchange rates. Exchange gains
and losses arising from translation are included in other income. 

Derivative financial instruments.  The derivative financial instruments used by
the company are foreign exchange forward contracts and options. The company does
not hold or issue derivatives for speculative trading purposes. These
instruments have been designated as hedges of certain forecasted transactional
exposures. For these financial instruments, no impact on financial position or
results of operations would result from a change in the underlying exchange
rate. All of the company's foreign currency contracts and options have been
designated as and are effective as hedges against specific exposures and have
been accounted for as such. Therefore, a change in the derivative's value would
be offset by an opposite change in the hedged exposure.

     The company monitors and controls its risks in the derivative transactions
referred to above by periodically assessing the cost of replacing, at market
rates, those contracts in the event of default by the counterparty. The company
believes such risk to be remote. In addition, before entering into derivative
contracts, and periodically during the life of the contract, the company reviews
the counterparties' financial condition. 

     Gains or losses on foreign exchange forward contracts and the cost of
foreign currency options are deferred in current liabilities and prepaid
expenses, respectively, and are recognized in income (either in revenue or cost
of revenue) when the transactions being hedged are recorded. Cash flows on such
instruments are reported in investing activities as proceeds or purchases of
investments. 

     If the criteria for hedge accounting discussed above were not met, gains or
losses on these instruments would be included in income currently and would not
be deferred. If a derivative financial instrument is terminated before the
transaction date of the hedged transaction, any deferred gain or loss would
continue to be deferred until the transaction date. If a forecasted transaction
is no longer likely to occur, any deferred gains or losses on financial
instruments that hedge such a transaction would be reported in income
immediately. 

Reclassifications. Certain prior-year amounts have been reclassified to conform
with the 1998 presentation.

                                      43

<PAGE>
 
2 Earnings per share

The following table shows how earnings per share was computed for the three
years ended December 31, 1998.


<TABLE> 
<CAPTION> 
Year ended December 31 
(Millions, except per share data)                                              1998           1997            1996
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>             <C> 
Earnings per share computation - basic
Income (loss) before extraordinary item                                      $  387.0       $ (834.5)       $   57.2
Less dividends on preferred shares                                             (106.5)        (111.1)         (120.8)
                                                                             ---------------------------------------
Income (loss) available to common stockholders before extraordinary item        280.5         (945.6)          (63.6)
Extraordinary item                                                                                             (12.1)
                                                                             ---------------------------------------
Net income (loss) available to common stockholders                           $  280.5       $ (945.6)       $  (75.7)
                                                                             ---------------------------------------
Weighted average shares (thousands)                                           251,786        182,016         172,507
                                                                             ---------------------------------------
                                                                                                             
Earnings per share - basic                                                                                   
Income (loss) before extraordinary item                                      $   1.11       $  (5.20)       $   (.37)
Extraordinary item                                                                                              (.07)
                                                                             ---------------------------------------
Net income (loss)                                                            $   1.11       $  (5.20)       $   (.44)
                                                                             ---------------------------------------
Earnings per share computation - diluted                                                                     
Income (loss) available to common stockholders before extraordinary item     $  280.5       $ (945.6)       $  (63.6)
Plus interest expense on assumed conversion of 8 1/4% Convertible                                            
  Notes due 2006, net of tax                                                      1.5                        
                                                                             ---------------------------------------
Income (loss) available to common stockholders before extraordinary item        282.0         (945.6)          (63.6)
Extraordinary item                                                                                             (12.1)
                                                                             ---------------------------------------
Net income (loss) available to common stockholders                           $  282.0       $ (945.6)       $  (75.7)
                                                                             ---------------------------------------
Weighted average shares (thousands)                                           251,786        182,016         172,507
Plus incremental shares from assumed conversions:                                                            
  Employee stock plans                                                         11,164                        
  8 1/4% Convertible Notes due 2006                                             3,994                        
                                                                             ---------------------------------------
Adjusted weighted average shares                                              266,944        182,016         172,507
                                                                             ---------------------------------------
Earnings per share - diluted                                                                                 
Income (loss) before extraordinary item                                      $   1.06       $  (5.20)       $   (.37)
Extraordinary item                                                                                              (.07)
                                                                             ---------------------------------------
Net income (loss)                                                            $   1.06       $  (5.20)       $   (.44)
                                                                             ---------------------------------------
</TABLE>
 

The shares listed below were not included in the computation of diluted earnings
per share because to do so would have been antidilutive for the periods
presented.

Year ended December 31 (thousands)       1998            1997            1996
--------------------------------------------------------------------------------
Employee stock plans                       101          22,792          20,636
Series A preferred stock                47,448          47,450          47,454
8 1/4% convertible notes due 2006                        4,042          43,491
8 1/4% convertible notes due 2000                                       33,697
--------------------------------------------------------------------------------

                                      44

<PAGE>
 

3 One-time charges

Strategic realignments. In the fourth quarter of 1997, the company recorded a
pretax charge of $113.6 million, $103.7 million after tax, or $.58 per diluted
common share. The charge was related to plans to discontinue the manufacturing
and assembly of personal computers and low-end servers, and to dispose of a
small, non-strategic technology product. The charge included (a) $64.9 million
for work-force reductions of approximately 1,000 people (500 US-based and 500
European-based), (b) $46.2 million for product and program discontinuances, and
(c) $2.5 million associated with facilities. A further breakdown of these costs
is as follows (in millions of dollars):


<TABLE>
<CAPTION>
                                                                       Personal         Non-Strategic
                                                                       Computers         Technology  
          Cost Category                                Total         Manufacturing        Product     
          -------------                                -----         -------------    -------------   
          <S>                                          <C>             <C>              <C>           
          Work-force reductions-                                                                      
          Europe                                      $ 54.5               $ 47.7            $ 6.8    
          US                                            10.4                 10.4                     
                                                      ------               ------            -----    
          Subtotal                                      64.9                 58.1              6.8    
                                                      ------               ------            -----    
                                                                                                      
          Products and Programs-                                                                      
          Provision for asset write-downs              15.0                  13.7              1.3    
          Associated goodwill                          33.7                  18.3             15.4    
          Cumulative translation adjustments           (2.5)                                  (2.5)   
                                                      -----                ------            -----    
          Subtotal                                     46.2                  32.0             14.2    
                                                      -----                ------            -----    
                                                                                                      
          Facilities (representing provision for                                                    
            idle lease costs)                           2.5                                    2.5             
                                                     ------                                  -----             
                                                                                                    
          Total charge                               $113.6                $ 90.1            $23.5             
                                                     ======                ======           ======          
</TABLE>
 

Activity related to these 1997 restructuring actions during the years ended 
December 31, 1998 and 1997, was as follows:


<TABLE> 
<CAPTION> 
                                                                Work-Force                                      
          (Millions)                                  Total     Reductions/(1)/    Facilities     Products       
                                                      -----     ---------------    ----------     --------       
          <S>                                         <C>       <C>                <C>            <C>             
          Total charge                                $113.6         $ 64.9          $  2.5        $ 46.2         
          Immediate asset write-downs                  (31.2)                                       (31.2)       
                                                      ------         ------          ------        ------        
                                                                                                                 
          Bal. at Dec. 31, 1997                         82.4           64.9             2.5          15.0        
                                                                                                                 
          Utilized                                     (40.0)         (32.0)                         (8.0)       
                                                                                                                 
          Other/(2)/                                   (20.8)         (18.3)           (2.5)            
                                                      ------         ------          ------        ------        
                                                                                                                 
          Bal. Dec. 31, 1998                          $ 21.6         $ 14.6          $    -        $  7.0        
                                                      ======         ======          ======        ======         
                                                                                                                 
          Expected future utilization:                                                                           
          1999                                        $ 17.2         $ 11.9                        $  5.3        
          2000                                           4.4            2.7                           1.7        
</TABLE>


/(1)/  Includes severance, notice pay, medical and other benefits.
/(2)/  Includes changes in estimates, reversals of excess reserves, translation 
       adjustments, and additional provisions.
 
In 1998, there was a reduction in accrued workforce provisions, principally for
the reversal of unneeded reserves due to approximately 150 voluntary
terminations, and the favorable results of negotiations on termination
indemnities relating principally to PC manufacturing personnel. In addition, as
a result of the sale of the non-strategic technology product operations in 1998
on more favorable terms than originally anticipated, the company reversed $6.0
million of unneeded accruals, principally for termination indemnities for
approximately 130 people.

Cash expenditures in 1998 relating to the above restructuring actions were $32.6
million. Employee levels were reduced in 1998 by 600 people through termination
actions. In addition, approximately 100 additional people will be terminated in
1999 as certain support operations are phased out in completion of the original
plan to discontinue PC manufacturing. The $14.6 million balance of the reserve
at December 31, 1998 for work-force reductions represents amounts of termination
indemnities expected for these actions. 

Other Restructuring Actions. The amounts below relate principally to
restructuring actions taken in 1995. In October 1995, the company announced that
it would realign internally into three business units - information services,
support services, and computer systems -each with its own marketing and sales
organization. In the fourth quarter of 1995, in connection with this
realignment, the company recorded a restructuring charge of $717.6 million. The
charge initially covered (a) $436.6 million for work force reductions of
approximately 7,900 people including severance, notice pay, medical, and other
benefits, (b) $218.6 million for consolidation of office facilities and
manufacturing capacity, and (c) $62.4 million for costs associated with product
and program discontinuances. Activity during the years ended December 31, 1998,
1997 and 1996 in the reserves related to these restructuring actions was as
follows.


<TABLE> 
<CAPTION> 
                                                                  Work-Force                                      
          (Millions)                                    Total     Reductions/(1)/    Facilities/(2)/     Products       
          ---------------------------------------------------------------------------------------------------------
          <S>                                          <C>        <C>                <C>                 <C>             
          Balance at Dec. 31, 1995                     $ 734.3        $ 473.3             $ 249.6         $ 11.4

          Utilized                                      (300.4)        (155.6)              (62.9)         (81.9)

          Other/(3)/                                         -         (110.2)                5.6          104.6
                                                       -------        -------             -------         ------ 
 
          Balance at Dec. 31, 1996                       433.9          207.5               192.3           34.1
          
          Utilized                                      (253.0)        (140.9)              (76.5)         (35.6)
          
          Other/(3)/                                      (9.7)          (1.0)              (15.1)           6.4
                                                       -------        -------             -------         ------  

          Balance at Dec. 31, 1997                       171.2           65.6               100.7            4.9
          
          Utilized                                       (87.3)         (48.0)              (36.0)          (3.3)
          
          Other/(3)/                                       2.0           10.8                (8.3)           (.5)
                                                       -------        -------             -------         ------  

          Balance at Dec. 31, 1998                     $  85.9        $  28.4             $  56.4         $  1.1
                                                       =======        =======             =======         ======

          Expected future utilization:       
          1999                                         $  53.9        $  20.8             $  32.0        $   1.1
          2000 and thereafter                             32.0            7.6                24.4              -
</TABLE>
 

/(1)/  Includes severance, notice pay, medical, and other benefits.
/(2)/  Includes consolidation of office facilities and manufacturing capacity.
/(3)/  Includes changes in estimates, reversals of excess reserves, translation
       adjustments, and additional provisions.

During 1996, the company experienced lower-than-anticipated costs for work-force
reductions. Revisions of estimates for these previously provided costs were
offset by additional provisions for product and program discontinuances and
facility consolidations.

Cash expenditures associated with these restructuring actions in 1998, 1997 and
1996 were $85.8 million, $178.7 million and $220.8 million, respectively.
Personnel reductions related to these restructuring actions during 1998, 1997,
and 1996 were approximately 300, 2,600 and 5,000, respectively. The $28.4
million balance of the reserve at December 31, 1998 for work-force reductions
represents the remaining balance of $17.2 million of extended payment severance
packages for terminated employees and an accrual of $11.2 million for planned
work-force reductions of approximately 350 people, which were identified in 1998
and late 1997 and which are expected to be completed by early 2000. The $56.4
million 1998 ending reserve balance for facility consolidations represents
contractual obligations (reduced by sub-lease income) existing under long-term
leases of vacated facilities.

Other Charges. Effective December 31, 1997, the company elected to change its
method of measuring goodwill impairment which is reported as a change in
accounting principle that is inseparable from a change in estimate. Prior to the
change, when impairment indicators existed, goodwill was evaluated for
impairment and any impairment would have been measured based on comparing the
unamortized goodwill to projected undiscounted operating results. Under the
company's new accounting method, any impairment of goodwill indicated by such
comparison would be measured by discounting projected cash flows using a
discount rate commensurate with the risks involved. If the estimate of the
future discounted cash flows, net of the carrying amount of tangible net assets,
is less than the carrying amount of goodwill, the difference would be charged to
operations. When a goodwill impairment must be recognized, the company believes
the discounted cash flow method is a better measurement of the remaining value
of goodwill, considering the company's circumstances, particularly the rapid
changes that continue to occur in the marketplace away from the proprietary
technology and maintenance businesses, and the continuing declines in revenue
and margins in these businesses.

In the fourth quarter of 1997, the company recorded an impairment charge of 
$883.6 million, or $4.85 per diluted common share, principally for the write-off
of goodwill related to the 1986 acquisition of Sperry Corporation. Yearly 
amortization of the goodwill was approximately $36 million.

In connection with a strategic operations review in the fourth quarter of 1997,
indicators of a potential impairment were identified, and the company concluded
that it should test the remaining Sperry goodwill for recoverability. The most
significant impairment indicator was an expected decline in Sperry-related
revenue. The majority of Sperry-related revenue results from hardware and
associated operating systems software. Since the acquisition of Sperry in 1986,
experience has seen a shift from centralized processing to desktop computing
with customer demand for open architectures. This shift in market demand led to
industry-wide erosions in demand for mainframe systems and continued competitive
pricing pressure. Another significant aspect to the decline in Sperry-related
revenue is the continuing industry-wide erosion of proprietary maintenance
revenue and margin streams. The company prepared an estimate of projected cash
flows relating to the remaining Sperry businesses. The sum of these expected
future undiscounted cash flows were less than the carrying amount of the
remaining Sperry goodwill, which indicated the existence of an impairment loss.
In preparing the cash flow analysis used by the company to measure goodwill
impairment for Sperry, the following major assumptions were used: (1) the
company's one year detail plan and its three-year strategic plan were used as a
basis to project future results, (2) a risk-based rate of 17.3% was used to
discount future cash flows, (3) a 6% compounded annual decline in Sperry-related
revenue, (4) a continuation of declining gross profit margins, (5) expense
levels were based on a percent of revenue, consistent with historical
experience, and (6) a 40% effective income tax rate. The projections of Sperry
related cash flows were based on management's best estimate of future results.
Actual results could differ materially from those estimates.

In addition, in the fourth quarter of 1997, the company completed the conversion
of $271.2 million of its 8 1/4% convertible subordinated notes due 2006. The 
conversion was in response to a special offer to pay holders of these notes a 
cash premium for each note converted. The company recorded a one-time charge of 
$42.0 million, or $.23 per diluted common share, to cover the cost of this 
special offer.

Summary. The 1997 restructuring and other charges were recorded in the following
statement of income classifications: Cost of revenue, $57.1 million; selling, 
general and administrative expenses, $12.3 million; research and development 
expenses, $4.9 million; impairment charges, $922.9 million; and other income 
expense, net, $42.0 million.

                                      45


<PAGE>
 

4  Accounting changes, adjustments and extraordinary item

Effective January 1, 1998, the company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" and SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions, and SOP 98-1 provides guidance on accounting
for the costs of computer software developed or obtained for internal use.
Adoption of SOP 97-2 and 98-1 did not have a material effect on the company's
consolidated financial position, consolidated results of operations, or
liquidity.

     As discussed in Note 14, effective January 1, 1998, the company adopted
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that companies report information about operating
segments. Adoption of SFAS No. 131 had no effect on the company's consolidated
financial position, consolidated results of operations, or liquidity. 

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for the year beginning January 1, 2000, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management is evaluating the impact this
statement may have on the company's financial statements. 

     As discussed in Note 3, effective December 31, 1997, the company elected to
change its method of measuring goodwill impairment. 

     Effective January 1, 1997, the company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement requires that if a transfer of financial assets
does not meet certain criteria for recording the transaction as a sale, the
transfer must be accounted for as a secured borrowing. The adoption of SFAS No.
125 did not have a material effect on the company's consolidated financial
position, consolidated results of operations, or liquidity. 

     Effective January 1, 1997, the company adopted SOP 96-1, "Environmental
Remediation Liabilities." The SOP provides authoritative guidance on the
recognition, measurement, display, and disclosure of environmental remediation
liabilities. Adoption of SOP 96-1 did not have a material effect on the
company's consolidated financial position, consolidated results of operations,
or liquidity.

                                      46

<PAGE>
 
     Effective January 1, 1996, the company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
requires the recognition or disclosure of compensation expense for grants of
stock options or other equity instruments issued to employees based upon their
fair value. As permitted by SFAS No. 123, the company adopted the
disclosure-only option and therefore will continue to apply APB Opinion 25 for
its stock plans. Accordingly, no compensation expense has been recognized for
its stock option or purchase plans. The adoption of these statements had no
effect on the company's consolidated financial position, consolidated results of
operations, or liquidity.

     The balance of accumulated deficit at December 31, 1996 has been restated 
from amounts previously reported to reflect an adjustment of $19.1 million
($29.0 million, net of taxes of $9.9 million) to recognize product warranty
costs for company-manufactured personal computers and low-end servers. Of this
amount, $4.6 million ($7.0 million, net of taxes of $2.4 million), or $.03 per
share, is applicable to 1996 and has been reflected as a decrease in net income
for that year, the balance (applicable to years prior to 1996) being charged to
accumulated deficit at December 31, 1995. In 1997, the company provided for this
obligation in connection with the restructuring charge related to its decision
to discontinue the manufacture and assembly of personal computers and low-end
servers. Prior to 1997, the company recognized warranty costs as expended based
on its belief that providing for this contingent obligation would not have
materially affected the company's consolidated financial statements. Following
discussions with the staff of the Securities and Exchange Commission, the
company agreed to recognize such amounts by means of a prior period adjustment,
which had the effect of reducing the net loss reported in 1997 by $19.1 million,
or $.10 per share. In addition, the company has reclassified $39.3 million of
impairment charges in 1997 previously reported in other income (expense), net.
These changes had no effect on shareholders' equity at December 31, 1997 or on
the 1998 results of operations.

     In 1996, the company recorded an extraordinary charge for extinguishment of
debt of $12.1 million, net of $6.5 million of income tax benefits, or $.07 per
diluted common share.

5  Inventories

Inventories comprise the following:

December 31 (Millions)                          1998                     1997 
-------------------------------------------------------------------------------
Parts and finished equipment                   $263.6                   $289.7
Work in process and materials                   199.7                    271.1
                                        --------------------------------------- 
Total inventories                              $463.3                   $560.8
-------------------------------------------------------------------------------
                              
     At December 31, 1998 and 1997, work in process inventories included $85.9
and $140.7 million, respectively, of costs related to long-term contracts.

6  Estimated income taxes

Year ended December 31 (Millions)         1998           1997            1996
-------------------------------------------------------------------------------
Income (loss) before income taxes
    United States                       $  408.3       $ (942.1)      $  (94.1)
    Foreign                                196.4          212.3          180.8
                                        ---------------------------------------
Total income (loss) before
  income taxes                          $  604.7       $ (729.8)      $   86.7
-------------------------------------------------------------------------------
Estimated income taxes (benefit)
    Current
       United States                    $   26.7       $   28.0       $  (15.0)
       Foreign                              51.8           69.0           87.0
       State and local                      23.3           23.1           10.9
                                        --------------------------------------- 
       Total                               101.8          120.1           82.9
                                        --------------------------------------- 
    Deferred
       United States                       115.2          (21.9)         (71.9)
       Foreign                                .7            6.8           11.0
       State and local                                      (.3)           7.5 
                                        --------------------------------------- 
       Total                               115.9          (15.4)         (53.4)
                                        --------------------------------------- 
Total estimated income taxes            $  217.7       $  104.7        $  29.5
-------------------------------------------------------------------------------

     Following is a reconciliation of estimated income taxes at the United
States statutory tax rate to estimated income taxes as reported:


Year ended December 31 (Millions)          1998           1997           1996
-------------------------------------------------------------------------------
United States statutory income
 tax (benefit)                          $  211.6       $ (255.4)       $  30.3
Difference in estimated income
 taxes on foreign earnings, losses,
 and remittances                           (46.1)         (35.7)           8.0
State taxes                                 15.1           14.8           11.8
Tax refund claims, audit issues,
 and other matters                          31.2           42.7          (12.9)
Amortization of goodwill                     1.8          335.1           12.6
Reversal of valuation allowances                                         (24.8) 
Other                                        4.1            3.2            4.5
                                        --------------------------------------- 
Estimated income taxes                  $  217.7       $  104.7        $  29.5
-------------------------------------------------------------------------------

                                      47

<PAGE>

        The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets and liabilities at December
31, 1998 and 1997, were as follows:

December 31 (Millions)                          1998                    1997
--------------------------------------------------------------------------------
Deferred tax assets
Capitalized research and 
  development                                $    591.6              $    327.4
Tax loss carryforwards                            256.9                   433.3
Foreign tax credit carryforwards                  232.3                   479.8
Other tax credit carryforwards                    138.2                    82.2
Prepayments                                       109.7
Postretirement benefits                            91.0                    88.0
Employee benefits                                  63.9                    65.4
Depreciation                                       60.8                    55.7
Restructuring                                      50.7                   103.9
Other                                             236.9                   265.1
                                            ------------------------------------
                                                1,832.0                 1,900.8
Valuation allowance                              (323.3)                 (400.7)
                                            ------------------------------------
Total deferred tax assets                    $  1,508.7              $  1,500.1
                                            ------------------------------------
Deferred tax liabilities
Pensions                                     $    337.3              $    319.5
Other                                             110.0                   146.0
                                            ------------------------------------
Total deferred tax liabilities               $    447.3              $    465.5
                                            ------------------------------------
Net deferred tax asset                       $  1,061.4              $  1,034.6
--------------------------------------------------------------------------------

     SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. During 1998, the net decrease in the valuation
allowance was $77.4 million.

     Cumulative undistributed earnings of foreign subsidiaries, for which no
U.S. income or foreign withholding taxes have been recorded, approximated $650
million at December 31, 1998. Such earnings are expected to be reinvested
indefinitely. Determination of the amount of unrecognized deferred tax liability
with respect to such earnings is not practicable. The additional taxes payable
on the earnings of foreign subsidiaries, if remitted, would be substantially
offset by U.S. tax credits for foreign taxes already paid. While there are no
specific plans to distribute the undistributed earnings in the immediate future,
where economically appropriate to do so, such earnings may be remitted. 

     Cash paid during 1998, 1997, and 1996 for income taxes was $92.7, $80.0,
and $112.7 million, respectively. 

     At December 31, 1998, the company has state and local tax loss
carryforwards and foreign tax loss carryforwards for certain foreign
subsidiaries, the tax effect of which is approximately $256.9 million. These
carryforwards will expire as follows (in millions): 1999, $3.8; 2000, $4.9;
2001, $14.3; 2002, $1.7; 2003, $6.4; and $225.8 thereafter. The company also has
available tax credit carryforwards of approximately $370.5 million, which will
expire as follows (in millions): 1999, $59.2; 2000, $49.4; 2001, $89.6; 2002,
$55.5; 2003, $7.2; and $109.6 thereafter.

     The company's net deferred tax assets include substantial amounts of
capitalized research and development, and tax credit carryforwards. Failure to
achieve forecasted taxable income might affect the ultimate realization of the
net deferred tax assets. There can be no assurance that in the future there
would not be increased competition or other factors that may result in a decline
in sales or margins, loss of market share, delays in product availability, or
technological obsolescence.

     The company is currently contesting issues before the Internal Revenue
Service in connection with Sperry Corporation for the years ended March 31,
1978, through September 16, 1986. In management's opinion, adequate provisions
for income taxes have been made for all years.

                                      48

<PAGE>
 
7 Properties

Properties comprise the following:



December 31 (Millions)                         1998                   1997
----------------------------------------------------------------------------
Land                                       $     10.3             $     24.5
Buildings                                       166.4                  208.7
Machinery and office equipment                1,247.0                1,250.0
Rental and outsourcing
  equipment                                     296.8                  290.9
                                           ---------------------------------   
Total properties                           $  1,720.5             $  1,774.1
----------------------------------------------------------------------------

8 Long-term debt

Long-term debt comprises the following:

December 31 (Millions)                         1998                   1997
----------------------------------------------------------------------------
12% senior notes due 2003                  $    425.0             $    425.0
11 3/4% senior notes due 2004                   450.0                  450.0
7 7/8% senior notes due 2008                    200.0
8 1/4% convertible subordinated
  notes due 2006                                 27.0                   27.8 
9 3/4% senior sinking fund
  debentures                                                           190.0
9 1/2% notes                                                           197.5
10 5/8% senior notes                                                   330.1
Other, net of unamortized
  discounts                                       7.2                   31.0
                                           ---------------------------------
Total                                         1,109.2                1,651.4
Less - Current maturities                         4.0                  213.1
                                           ---------------------------------
Total long-term debt                       $  1,105.2             $  1,438.3
----------------------------------------------------------------------------

     Total long-term debt maturities in 1999, 2000, 2001, 2002, and 2003 are
$4.0, $4.6, $.6, $.4, and $425.0 million, respectively. 

     Cash paid during 1998, 1997, and 1996 for interest was $185.6, $253.1, and
$255.1 million, respectively.

     On January 30, 1998, the company issued $200 million of 7 7/8% senior notes
due 2008. The net proceeds from the sale of the notes were used to call $200
million principal amount of the 10 5/8% senior notes due October 1999 at
101.77%. On February 5, 1998, the company redeemed all $197.5 million of the 
9 1/2% senior notes due on July 15, 1998.

     On September 15, 1998, the company made a $30.0 million sinking fund
payment, which included a $20.0 million optional prepayment, on the 9 3/4%
sinking fund debentures. On October 1, 1998, the company redeemed at par the
remaining $130.1 million outstanding of the 10 5/8% notes. 

     On December 4, 1998, the company redeemed the remaining $160.0 million of
the 9 3/4% sinking fund debentures at the stated redemption price of 103.61% of
principal. 

     The company has a $400 million, three year credit agreement expiring June
2001. As of December 31, 1998, there were no borrowings outstanding under the
facility and the entire $400 million was available for borrowings. The company
pays commitment fees on the total amount of the facility. In addition,
international subsidiaries maintain short-term credit arrangements with banks in
accordance with local customary practice. 

                                      49

<PAGE>
 
9  Other accrued liabilities 

Other accrued liabilities (current) comprise the following:

December 31 (Millions)                            1998                  1997
-----------------------------------------------------------------------------
Payrolls and commissions                       $  331.8              $  288.7
Customers' deposits and
  prepayments                                     628.9                 540.2
Taxes other than income taxes                     132.9                 130.5
Restructuring*                                     70.7                 205.2
Other                                             137.6                 142.6
                                               ------------------------------
Total other accrued liabilities                $1,301.9              $1,307.2
-----------------------------------------------------------------------------

* At December 31, 1998 and 1997, an additional $36.8 million and $48.4
  million, respectively, was reported in other liabilities (long term) on the
  consolidated balance sheet. 

10 Comprehensive income 

Comprehensive income for the three years ended December 31, 1998, includes
the following components:

Year ended 
December 31 (Millions)                         1998         1997          1996
-------------------------------------------------------------------------------
Net income (loss)                           $  387.0      $(834.5)      $  45.1
                                            -----------------------------------
Other comprehensive
  income (loss)
    Foreign currency translation
      adjustments*                             (89.6)       (40.4)        (35.8)
    Related tax (benefit) expense               (6.1)        17.6          15.1
                                            -----------------------------------
Total other comprehensive
  income (loss)                                (83.5)       (58.0)        (50.9)
                                            -----------------------------------
Comprehensive income (loss)                 $  303.5      $(892.5)      $  (5.8)
-------------------------------------------------------------------------------

* Net of income (loss) on translation adjustments reclassified to income upon
  sale or writeoff of ownership interest in foreign investments as follows:
  1998, $(.1) million; 1997, $2.8 million; and 1996, $1.5 million.

11 Leases

Rental expense, less income from subleases, for 1998, 1997, and 1996 was $145.6,
$153.5, and $177.7 million, respectively.

     Minimum net rental commitments under noncancelable operating leases
outstanding at December 31, 1998, substantially all of which relate to real
properties, were as follows: 1999, $133.6 million; 2000, $106.2 million; 2001,
$85.6 million; 2002, $66.2 million; 2003, $49.3 million; and thereafter, $330.6
million. Such rental commitments have been reduced by minimum sublease rentals
of $97.9 million due in the future under noncancelable subleases.

12 Financial instruments

The company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign currency exchange rates. The derivative
instruments used are foreign exchange forward contracts and options. These
derivatives, which are over-the-counter instruments, are non-leveraged and
involve little complexity. 

     Due to its foreign operations, the company is exposed to the effects of
foreign currency exchange rate fluctuations on the U.S. dollar. Foreign exchange
forward contracts and options generally having maturities of less than nine
months are entered into for the sole purpose of hedging certain transactional
exposures. 

     The cost of foreign currency options is recorded in other current assets in
the consolidated balance sheet. At December 31, 1998, such amount was $4.2
million. When the U.S. dollar strengthens against foreign currencies, the
decline in value of the underlying exposures is partially offset by gains in the
value of purchased currency options designated as hedges. When the U.S. dollar
weakens, the increase in the value of the underlying exposures is reduced only
by the premium paid to purchase the options. The cost of options and any gains
thereon are reported in income when the related transactions being hedged
(generally within 12 months) are recognized.

                                      50

<PAGE>
 
     The company also enters into foreign exchange forward contracts. Gains and
losses on such contracts, which hedge transactional exposures, are deferred and
included in current liabilities until the corresponding transaction is
recognized. At December 31, 1998, the company had a total of $192.3 million (of
notional value) of such contracts, $181.9 million to sell foreign currencies,
and $10.4 million to buy foreign currencies. At December 31, 1997, the company
had a total of $205.4 million (of notional value) of foreign exchange forward
contracts, $159.1 million to sell foreign currencies, and $46.3 million to buy
foreign currencies. At December 31, 1998, a realized net loss on such contracts
of approximately $9.2 million was deferred and included in current liabilities.
Gains or losses on foreign exchange forward contracts that hedge foreign
currency transactions are reported in income when the related transactions being
hedged (generally within 12 months) are recognized.

     Financial instruments comprise the following:

December 31 (Millions)                              1998              1997
----------------------------------------------------------------------------
Outstanding:
  Long-term debt                                  $1,109.2          $1,651.4
  Foreign exchange forward contracts*                192.3             205.4
  Foreign exchange options*                          262.2             284.4
                                                  --------------------------
Estimated fair value:
  Long-term debt                                  $1,350.4          $1,823.4
  Foreign exchange forward contracts                   1.5              (6.1)
  Foreign exchange options                             2.8               5.9
----------------------------------------------------------------------------
 
* notional value

     Financial instruments also include temporary cash investments and customer
accounts receivable. Temporary investments are placed with creditworthy
financial institutions, primarily in over-securitized treasury repurchase
agreements, Euro-time deposits, or commercial paper of major corporations. At
December 31, 1998, the company's cash equivalents principally have maturities of
less than one month. Due to the short maturities of these instruments, they are
carried on the balance sheet at cost plus accrued interest, which approximates
market value. Realized gains or losses during 1998 and 1997, as well as
unrealized gains or losses at December 31, 1998, were immaterial. Receivables
are due from a large number of customers that are dispersed worldwide across
many industries. At December 31, 1998 and 1997, the company had no significant
concentrations of credit risk.

     The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these instruments. The fair value of the
company's long-term debt is based on the quoted market prices for publicly
traded issues. For debt that is not publicly traded, the fair value is
estimated, after considering any conversion terms, based on current yields to
maturity for the company's publicly traded debt with similar maturities. In
estimating the fair value of its derivative positions, the company utilizes
quoted market prices, if available, or quotes obtained from outside sources.

                                      51

<PAGE>
 
13 Litigation

There are various lawsuits, claims, and proceedings that have been brought or
asserted against the company. Although the ultimate results of these lawsuits,
claims, and proceedings are not currently determinable, management does not
expect that these matters will have a material adverse effect on the company's
consolidated financial position, consolidated results of operations, or
liquidity.

14 Segment information

In 1998, the company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that companies report information about operating segments, geographic
areas, and major customers in annual financial statements and requires that
those companies report selected information about operating segments in interim
financial reports. The adoption of SFAS No. 131 had no effect on the company's
consolidated financial position, consolidated results of operations, or
liquidity.

     The company has two business segments: Services and Technology. The
products and services of each segment are marketed throughout the world to
commercial businesses and governments. The major service and product lines by
segment are as follows: Services - systems integration, including repeatable and
custom solutions, outsourcing, network services, and multivendor maintenance;
Technology - enterprise-class servers, specialized technologies, and personal
computers.

     The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies, except for warranty
obligations related to company-manufactured PCs in the Technology business
segment. For segment reporting purposes, prior to 1998, such costs are accounted
for on a cash basis, whereas on a total company basis, such costs are accounted
for on an accrual basis. In 1998, the company outsourced the manufacture of such
products and any warranty costs related to company-manufactured PCs are
considered corporate costs. The effect of the difference between the cash and
accrual basis in 1996 and 1997 was immaterial. Intersegment sales and transfers
are priced as if the sales or transfers were to third parties. The company
evaluates business segment performance on operating income exclusive of
restructuring charges and unusual and nonrecurring items. All corporate and
centrally incurred costs are allocated to the business segments based
principally on assets, revenue, employees, square footage, or usage.

     Corporate assets are principally cash and cash equivalents, goodwill
related to the acquisition of Sperry Corporation, prepaid pension assets, and
deferred income taxes. The expense or income related to corporate assets are
allocated to the business segments. In addition, corporate assets include an
offset for accounts receivable that have been recorded as sales in accordance
with SFAS No. 125 because such receivables are included in the assets of the
business segments.

     No single customer accounts for more than 10% of revenue. Revenue from
various agencies of the U.S. Government, which is reported in both business
segments, approximated $917, $791, and $542 million in 1998, 1997, and 1996,
respectively.

                                      52

<PAGE>
 
     A summary of the company's operations by business segment for 1998, 1997,
and 1996 is presented below:


<TABLE>
<CAPTION>

(Millions of dollars)                                   Total            Corporate         Services        Technology
------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>               <C>              <C>
1998
-------------------
Customer revenue                                      $  7,208.4                          $  4,909.3       $  2,299.1
Intersegment                                                            $   (511.2)             73.7            437.5
                                                     -------------------------------------------------------------------
Total revenue                                         $  7,208.4        $   (511.2)       $  4,983.0       $  2,736.6
                                                     -------------------------------------------------------------------
Operating income (loss)                               $    810.2        $    (45.3)       $    343.5       $    512.0
Depreciation and
   amortization                                            266.4                                84.1            182.3
Total assets                                             5,577.7           2,705.7           1,814.2          1,057.8
Investments at equity                                      184.6               2.1                              182.5
Capital expenditures for
   properties                                              207.3              44.2              84.7             78.4

1997
-------------------
Customer revenue                                      $  6,636.0                          $  4,281.0       $  2,355.0
Intersegment                                                            $   (483.8)             70.0            413.8
                                                     -------------------------------------------------------------------
Total revenue                                         $  6,636.0        $   (483.8)       $  4,351.0       $  2,768.8
                                                     -------------------------------------------------------------------
Operating income (loss)                               $   (389.8)       $ (1,001.1)       $    167.2       $    444.1
Depreciation and
   amortization                                          1,216.9             952.2              86.8            177.9
Total assets                                             5,591.3           2,769.8           1,554.6          1,266.9
Investments at equity                                      215.7               9.9                              205.8
Capital expenditures for
   properties                                              179.9                                77.7            102.2

1996
-------------------
Customer revenue                                      $  6,370.5                          $  4,008.8       $  2,361.7
Intersegment                                                            $   (529.3)             82.1            447.2
                                                     -------------------------------------------------------------------
Total revenue                                         $  6,370.5        $   (529.3)       $  4,090.9       $  2,808.9
                                                     -------------------------------------------------------------------
Operating income (loss)                               $    320.4        $    (54.0)       $    123.1       $    251.3
Depreciation and
   amortization                                            329.7              36.9             101.4            191.4
Total assets                                             6,967.1           3,709.4           1,702.3          1,555.4
Investments at equity                                      244.4              10.1                              234.3
Capital expenditures for
   properties                                              162.3                                62.5             99.8
------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      53

<PAGE>
 
Presented below is a reconciliation of total business segment operating
income to consolidated income before income taxes:


<TABLE>  
<CAPTION> 

Year Ended December 31
(Millions)                                1998              1997               1996
----------------------------------------------------------------------------------------
<S>                                    <C>              <C>                 <C>    
Total segment operating
   income                              $   855.5        $    611.3          $   374.4
Interest expense                          (171.7)           (233.2)            (249.7)
Other income (expense), net                (33.8)           (106.8)              16.0
Impairment charges                                          (922.9)
Other special charges                                        (74.3)
Corporate and eliminations                 (45.3)             (3.9)             (54.0)
                                       ------------------------------------------------- 
  Total income (loss) before
    income taxes                       $   604.7        $   (729.8)         $    86.7
----------------------------------------------------------------------------------------
</TABLE>
 

Presented below is a reconciliation of total business segment assets to
consolidated assets:

<TABLE> 
<CAPTION> 

December 31 (Millions)                    1998               1997              1996
----------------------------------------------------------------------------------------
<S>                                    <C>              <C>                 <C>    
Total segment assets                   $ 2,872.0        $  2,821.5          $ 3,257.7
Cash and cash equivalents                  604.3             803.0            1,029.2
Prepaid pension assets                     833.8             762.4              788.5
Deferred income taxes                    1,123.2           1,127.1            1,044.5
Elimination for sale of receivables        (28.4)           (125.9)            (276.9)
Goodwill                                                                        924.6
Other corporate assets                     172.8             203.2              199.5
                                       ------------------------------------------------- 
  Total assets                         $ 5,577.7        $  5,591.3          $ 6,967.1
----------------------------------------------------------------------------------------
</TABLE>
 

Geographic information about the company's revenue, which is principally based
on location of the selling organization, and properties, is presented below:


<TABLE> 
<CAPTION> 

(Millions)                                1998             1997                 1996
----------------------------------------------------------------------------------------
<S>                                    <C>              <C>                 <C> 
Revenue
  United States                        $  3,118.8       $  2,705.5          $  2,350.0
  Foreign                                 4,089.6          3,930.5             4,020.5
                                       ------------------------------------------------- 
    Total                              $  7,208.4       $  6,636.0          $  6,370.5
                                       ------------------------------------------------- 
Properties, net
  United States                        $    317.8       $    307.4          $    340.3
  Brazil                                     61.9             67.9                56.1
  Other foreign                             201.2            205.9               225.4
                                       ------------------------------------------------- 
    Total                              $    580.9       $    581.2          $    621.8
----------------------------------------------------------------------------------------
</TABLE>
  

                                      54

<PAGE>
 
15  Employee plans

Stock plans. Under plans approved by the stockholders, stock options, stock
appreciation rights, restricted stock, and restricted stock units may be granted
to officers and other key employees. 

     Options have been granted to purchase the company's common stock at 100% of
the fair market value at the date of grant. Options have a maximum duration of
ten years and generally become exercisable in annual installments over a
four-year period following date of grant.

     Restricted stock and restricted stock units have been granted and are
subject to forfeiture until the expiration of a specified period of service
commencing on the date of grant. Compensation expense resulting from the awards
is charged to income ratably from the date of grant until the date the
restrictions lapse and is based on fair market value at the date of grant.
During the year ended December 31, 1998, there were no grants or forfeitures.
During the year ended December 31, 1997, .7 million shares of restricted stock
and restricted stock units were granted at a weighted average fair market value
of $8.79 per share, and .3 million shares and units were forfeited. During the
year ended December 31, 1996, 2.9 million shares of restricted stock and
restricted stock units were granted at a weighted average fair market value of
$7.06 per share, and .5 million shares and units were forfeited. During the
years ended December 31, 1998, 1997, and 1996, $6.0, $6.4, and $4.6 million was
charged to income, respectively.

     Effective July 1, 1998, the company implemented a world-wide Employee Stock
Purchase Plan ("ESPP"), which enables substantially all regular employees to
purchase full or fractional shares of the company's common stock through payroll
deductions of up to 10% of eligible pay. The price the employee pays is 85% of
the market price at the beginning or end of a calendar quarter, whichever is
lower. During the year ended December 31, 1998, employees purchased shares, all
of which were newly issued shares, for which $5.6 million was paid to the
company.

     U.S. employees are eligible to participate in an employee savings plan.
Under this plan, a percentage of the employee's pay may be contributed to
various investment alternatives. Effective July 1, 1998, a company match for up
to 1% of pay was reinstituted. The match consists of the company contributing
newly issued shares of its common stock to the plan. The charge to income,
related to such company match, was $4.1 million in 1998.

     Effective January 1, 1996, the company adopted the disclosure-only option
under SFAS No. 123, "Accounting for Stock-Based Compensation." The company
continues to apply APB Opinion 25 for its stock plans. Accordingly, no
compensation expense has been recognized for stock options granted and for
common stock purchases under the ESPP.

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the company had
accounted for its stock plans under the fair value method of SFAS No. 123. The
fair value of stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997, and 1996, respectively: risk-free interest rates of
5.67%, 6.59%, and 6.34%, volatility factors of the expected market price of the
company's common stock of 55%, a weighted average expected life of the options
of five years, and no dividends. 

     For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The company's
pro forma net income (loss) for the years ended December 31, 1998, 1997, and
1996, respectively, follows: 1998, $373.2 million, or income of $1.00 per
diluted share; 1997, $(839.2) million, or a loss of $5.22 per share; and 1996,
$41.4 million, or a loss of $.46 per share.

                                      55

<PAGE>
 
A summary of the status of stock option activity follows:


<TABLE> 
<CAPTION> 

Year ended December 31                          
(Shares in thousands)                                1998                        1997                        1996            
-------------------------------------------------------------------      ------------------------   ------------------------
                                                      Weighted Avg.                Weighted Avg.              Weighted Avg.
                                           Shares    Exercise Price       Shares   Exercise Price     Shares  Exercise Price
                                         --------------------------      ------------------------   ------------------------
<S>                                      <C>         <C>                 <C>       <C>              <C>       <C>         
Outstanding at
  beginning of year                         20,281       $ 9.67           18,224       $10.16         17,429       $11.48
Granted                                      5,305        22.74            5,259         7.49          4,493         6.23
Exercised                                   (6,839)       10.75             (944)        8.45           (119)        4.20
Forfeited and expired                         (770)       13.07           (2,258)        9.36         (3,579)       11.87
                                         --------------------------      ------------------------   -------------------------
Outstanding at end of year                  17,977        12.97           20,281         9.67         18,224        10.16
                                         --------------------------      ------------------------   -------------------------
Exercisable at end of year                   7,494        10.27           11,237        11.26         10,499        11.57
                                         --------------------------      ------------------------   -------------------------
Shares available for granting
  options at end of year                     4,592                         4,058                       4,351
                                         --------------------------      ------------------------   -------------------------
Weighted average fair value
  of options granted during
  the year                                               $12.16                        $ 3.99                      $ 3.40

</TABLE>
 

<TABLE> 
<CAPTION> 

December 31, 1998
(Shares in thousands)                Outstanding                         Exercisable
-----------------------------------------------------------------  -------------------------- 
Exercise                               Average        Average                    Average
Price Range               Shares        Life *    Exercise Price    Shares    Exercise Price
-----------------------------------------------------------------  -------------------------- 
<S>                       <C>        <C>          <C>              <C>        <C>      
$4-7                       6,031         7.79         $ 6.20         1,997        $ 6.07 
$7-20                      6,971         5.08          11.76         5,482         11.75 
$20-33                     4,975         9.32          22.87            15         26.20 
                         ----------------------------------------  -------------------------- 
Total                     17,977         7.16          12.97         7,494         10.27 
-----------------------------------------------------------------  --------------------------       
</TABLE>
 
* Average contractual remaining life in years.

                                      56

<PAGE>
 
Retirement benefits 

Retirement plans funded status and amounts recognized in the company's
consolidated balance sheet at December 31, 1998 and 1997, follows:


<TABLE>
<CAPTION>
                                                                          U.S. Plans          International Plans 
                                                                          ----------          ------------------- 
December 31 (Millions)                                                1998         1997         1998        1997
----------------------------------------------------------------------------------------------------------------- 
<S>                                                                <C>           <C>           <C>         <C>   
Change in benefit obligation
  Benefit obligation at beginning of year                          $3,543.7      $3,299.7      $685.4      $747.8
  Service cost                                                         35.7          33.4        15.3        14.2
  Interest cost                                                       248.3         247.3        45.8        42.8
  Plan participants' contributions                                                                9.7        10.5
  Plan amendments                                                        .6           2.5         3.0
  Actuarial loss                                                      105.8         202.5        76.5        43.4
  Benefits paid                                                      (250.0)       (237.8)      (34.5)      (31.0)
  Effect of settlements/curtailments                                                 (3.9)                  (24.4)
  Foreign currency translation adjustment                                                        10.5       (56.4)
  Other                                                                                                     (61.5)
                                                                  ------------------------------------------------       
  Benefit obligation at end of year                                $3,684.1      $3,543.7      $811.7      $685.4
----------------------------------------------------------------------------------------------------------------- 

Change in plan assets
  Fair value of plan assets at beginning of year                   $4,107.1      $3,662.8      $789.3      $891.9
  Actual return on plan assets                                        597.2         680.4        86.6       105.6
  Employer contribution                                                 4.8           4.6        13.9        13.9
  Plan participants' contributions                                                                9.7        10.5
  Benefits paid                                                      (250.0)       (237.8)      (34.5)      (31.0)
  Effect of settlements                                                              (2.9)                  (75.1)
  Foreign currency translation adjustment                                                        10.6       (66.7)
  Other                                                                                           2.3       (59.8)
                                                                  ------------------------------------------------       
  Fair value of plan assets at end of year                         $4,459.1      $4,107.1      $877.9      $789.3
----------------------------------------------------------------------------------------------------------------- 

Funded status                                                        $775.0        $563.4       $66.2      $103.9
  Unrecognized net actuarial loss (gain)                               13.1         171.9       (17.8)      (63.9)
  Unrecognized prior service (benefit) cost                           (28.0)        (35.7)        9.1         7.0
  Unrecognized net obligation at date of adoption                       1.5           2.2         1.0         1.0
                                                                  ------------------------------------------------       
  Prepaid pension cost                                               $761.6        $701.8       $58.5       $48.0
----------------------------------------------------------------------------------------------------------------- 

Amounts recognized in the statement of
    financial position consist of:
  Prepaid pension cost                                               $761.6        $701.8       $72.2       $60.6
  Other liabilities                                                                             (13.7)      (12.6)    
                                                                  ------------------------------------------------       
                                                                     $761.6        $701.8       $58.5       $48.0
----------------------------------------------------------------------------------------------------------------- 
</TABLE>
 
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for plans with accumulated benefit obligations in excess of
plan assets was as follows (in millions of dollars): $92.0 million, $86.2
million, and $13.3 million at December 31, 1998; and $81.9 million, $76.1
million, and $13.7 million at December 31, 1997.

                                      57

<PAGE>
 
Net periodic pension costs for 1998, 1997, and 1996 includes the following
components:


<TABLE>
<CAPTION>
                                                                      U.S. Plans                      International Plans
                                                         ----------------------------------    ---------------------------------
Year ended December 31 (Millions)                           1998         1997         1996         1998        1997        1996
-------------------------------------------------------------------------------------------------------------------------------- 
<S>                                                         <C>          <C>          <C>         <C>         <C>         <C>  
Service cost                                              $  35.7      $  33.4      $  34.6      $ 15.3      $ 14.2      $ 20.9
Interest cost                                               248.3        247.3        242.5        45.8        42.8        45.8
Expected return on plan assets                             (356.5)      (332.6)      (323.0)      (56.8)      (53.7)      (61.6)
Amortization of prior service (benefit) cost                 (6.6)        (7.3)        (8.0)         .8          .7          .9
Amortization of asset or liability at adoption                 .7           .7           .7                      .1          .1
Recognized net actuarial loss (gain)                         23.7         23.6         20.3         (.1)       (1.8)       (2.7)
Settlement/curtailment (gain) loss                            (.4)        (2.8)        (6.6)                     .4         3.9
                                                        ------------------------------------------------------------------------
Net periodic pension (income) cost                        $ (55.1)     $ (37.7)     $ (39.5)     $  5.0      $  2.7      $  7.3
-------------------------------------------------------------------------------------------------------------------------------- 

Weighted-average assumptions as of December 31 were 
 as follows:

Discount rate                                                7.00%        7.25%        7.75%       6.36%       6.77%       7.11%
Rate of compensation increase                                5.40%        5.40%        5.40%       4.07%       3.74%       3.88%
Expected long-term rate of return on assets                 10.00%       10.00%       10.00%       8.23%       8.25%       8.33%
-------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>



Other postretirement benefits 

A reconciliation of the benefit obligation, fair value of the plan assets, and
the funded status of the postretirement medical plan at December 31, 1998 and
1997, follows:

December 31 (Millions)                                     1998           1997
--------------------------------------------------------------------------------
Change in benefit obligation
   Benefit obligation at beginning of year              $  227.4      $  221.6
   Interest cost                                            15.5          16.3
   Plan participants' contributions                         24.6          26.9
   Actuarial (gain) loss                                    (2.1)          9.9
   Benefits paid                                           (39.6)        (47.3)
                                                        ------------------------
Benefit obligation at end of year                       $  225.8      $  227.4
                                                        ------------------------
Change in plan assets
   Fair value of plan assets at beginning
     of year                                            $   15.4      $   24.8
   Actual return on plan assets                              1.0           1.8
   Employer contributions                                   11.9           9.2
   Plan participants' contributions                         24.6          26.9
   Benefits paid                                           (39.6)        (47.3)
                                                        ------------------------
Fair value of plan assets at end of year                $   13.3      $   15.4
                                                        ------------------------
Funded status                                           $ (212.5)     $ (212.0)
Unrecognized net actuarial loss                             16.8          19.3
Unrecognized prior service benefit                         (22.9)        (25.5)
                                                        ------------------------
Accrued benefit cost                                    $ (218.6)     $ (218.2)
--------------------------------------------------------------------------------

Net periodic postretirement benefit cost for 1998, 1997, and 1996 follows:
   
Year ended December 31 (Millions)               1998        1997          1996
--------------------------------------------------------------------------------
Interest cost                                  $15.5       $16.3         $16.0
Expected return on plan assets                  (1.1)       (1.8)         (2.1)
Amortization of prior                                                 
  service benefit                               (2.7)       (2.7)         (2.7)
Recognized net actuarial loss (gain)              .6         1.2           (.4)
                                             -----------------------------------
Net periodic benefit cost                      $12.3       $13.0         $10.8
                                             -----------------------------------

Weighted-average assumptions as of December 31 were as follows:

Discount rate                                   7.20%       7.30%         7.50%
Expected return on plan assets                  8.00%       8.00%         8.00%
--------------------------------------------------------------------------------

     The assumed health care cost trend rate used in measuring the expected cost
of benefits covered by the plan was 8.75% for 1999, gradually declining to 5.5%
in 2006 and thereafter. A one-percentage point increase (decrease) in the
assumed health care cost trend rate would increase (decrease) the accumulated
postretirement benefit obligation at December 31, 1998, by $10.8 million and
$(9.9) million, respectively, and increase (decrease) the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for 1998 by $.8 million and $(.7) million, respectively.

                                      58

<PAGE>
 
16  Stockholders' equity

The company has 720.0 million authorized shares of common stock, par value $.01
per share, and 40.0 million shares of authorized preferred stock, par value $1
per share, issuable in series. The company has authorization to issue up to 30.0
million shares of Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock").

     Each share of Series A Preferred Stock (i) accrues quarterly cumulative
dividends of $3.75 per share per annum, (ii) has a liquidation preference of
$50.00 plus accrued and unpaid dividends, (iii) is convertible into 1.67 shares
of the company's common stock, subject to customary anti-dilution adjustments,
and (iv) is redeemable at the option of the company under certain circumstances
at $50.00 per share. In addition, shares of Series A Preferred Stock have
priority as to dividends over holders of the company's common stock that rank
junior with regard to dividends.

     In 1997, the company redeemed at stated value all $150.0 million of its
Series B and C Preferred Stock.

     In December 1998, the company called 2.0 million of its Series A Preferred
Stock for redemption. On January 21, 1999, 1.9 million shares of Series A
Preferred Stock were converted into 3.2 million shares of the company's common
stock and 270 thousand shares of Series A Preferred Stock were redeemed for
$13.5 million. Included in the above number were 184 thousand shares of Series A
Preferred Stock that were voluntarily converted into the company's common stock
during the call period. In addition, on January 21, 1999, the company announced
that it was calling for redemption on March 4, 1999, an additional 6.0 million
shares of its Series A Preferred Stock.

     Each outstanding share of common stock has attached to it one preferred
share purchase right. The rights become exercisable only if a person or group
acquires 20% or more of the company's common stock, or announces a tender or
exchange offer for 30% or more of the common stock. Until the rights become
exercisable, they have no dilutive effect on net income per common share.

     At December 31, 1998, 82.0 million shares of unissued common stock of the
company were reserved for the following: 47.4 million for convertible preferred
stock, 3.9 million for the 8 1/4 % convertible subordinated notes due 2006, and
30.7 million for stock options and for stock purchase and savings plans.

     Changes in issued shares during the three years ended December 31, 1998,
were as follows:

                                          Series A        
                                         Preferred      Common        Treasury
(Thousands)                                Stock         Stock          Stock
-------------------------------------------------------------------------------
Balance at December 31, 1995              28,405       172,316           (893)
Issuance of stock under stock
  option and other plans                                 3,426             (6)
Other                                                        1
                                          -------------------------------------
Balance at December 31, 1996              28,405       175,743           (899)
Conversions to common stock                   (2)       73,150
Issuance of stock under stock
  option and other plans                                 1,245            160
Other                                                       84      
                                          -------------------------------------
Balance at December 31, 1997              28,403       250,222           (739)
Conversions to common stock                   (2)          110
Issuance of stock under stock
  option and other plans                                 7,557           (553)
                                          -------------------------------------
Balance at December 31, 1998              28,401       257,889         (1,292)
-------------------------------------------------------------------------------

                                      59

<PAGE>
 

Report of Independent Auditors

To the Board of Directors of Unisys Corporation

     We have audited the accompanying consolidated balance sheets of Unisys
Corporation at December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of Unisys Corporation'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 consolidated financial position of Unisys
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

     As described in Note 3 to the consolidated financial statements, effective
December 31, 1997, Unisys Corporation changed its method of accounting for the
measurement of goodwill impairment.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
January 14, 1999, except for the fourth paragraph of Note 16, 

  as to which the date is January 21, 1999

                                      60

<PAGE>
 
Unisys Corporation

Supplemental Financial Data (Unaudited)

Quarterly financial information


<TABLE>  
<CAPTION>

                                                  First         Second          Third         Fourth  
(Millions, except per share data)                Quarter        Quarter        Quarter        Quarter          Year
------------------------------------------------------------------------------------------------------------------------

1998
------------------------
<S>                                              <C>            <C>            <C>            <C>            <C>
Revenue                                          $1,649.7       $1,728.5       $1,781.4       $2,048.8       $7,208.4
Gross profit                                        559.2          582.9          600.2          707.5        2,449.8
Income before income taxes                           98.0          140.8          149.4          216.5          604.7
Net income                                           62.7           90.1           95.6          138.6          387.0
Dividends on preferred shares                        26.7           26.6           26.6           26.6          106.5
Earnings on common shares                            36.0           63.5           69.0          112.0          280.5
Earnings per common share - basic                     .14            .25            .27            .44           1.11
                          - diluted                   .14            .24            .26            .42           1.06
Market price per common share - high              20 3/16         28 3/8       30 11/16         35 3/8         35 3/8
                              - low               13 5/16         17 1/4         17 5/8         18 1/8        13 5/16
------------------------------------------------------------------------------------------------------------------------

1997
------------------------
Revenue                                          $1,530.7       $1,585.3       $1,621.4       $1,898.6       $6,636.0 
Gross profit                                        515.7          538.4          575.0          633.5        2,262.6 
Income (loss) before income taxes                    30.6           66.5           80.8         (907.7)        (729.8)
Net income (loss)*                                   19.3           41.9           50.9         (946.6)        (834.5)
Dividends on preferred shares                        30.1           27.8           26.6           26.6          111.1 
Earnings (loss) on common shares                    (10.8)          14.1           24.3         (973.2)        (945.6)
Earnings (loss) per common share - basic             (.06)           .08            .14          (4.66)         (5.20)
                                 - diluted*          (.06)           .08            .13          (4.66)         (5.20)
Market price per common share - high                7 5/8              8         15 3/4         16 1/2         16 1/2 
                              - low                 6 1/4          5 3/4          7 3/8         11 1/8          5 3/4 
------------------------------------------------------------------------------------------------------------------------
</TABLE>
  
 
* In the fourth quarter of 1997, the company recorded one-time charges to net
  income of $1,029.3 million. Before these charges, fourth-quarter net income
  was $82.7 million, or $.23 per diluted common share, and full-year net income
  was $194.8 million, or $.44 per diluted common share. See Note 3 of the Notes
  to Consolidated Financial Statements. 

  The individual quarterly per-common share amounts may not total to the per-
  common share amount for the full year because of accounting rules governing
  the computation of earnings per common share.

  Market prices per common share are as quoted on the New York Stock Exchange
  composite listing.

                                      61

<PAGE>
 
Eight-year summary of selected financial data


<TABLE>
<CAPTION>

(Millions, except per share data)              1998     1997(1)     1996      1995(1)    1994(1)     1993      1992     1991(1)
------------------------------------------------------------------------------------------------------------------------------------

<S>                                          <C>       <C>        <C>        <C>        <C>        <C>       <C>       <C>
Results of operations(2) 
Revenue                                      $7,208.4  $6,636.0   $6,370.5   $6,342.3   $6,095.5   $6,107.1  $6,715.6  $6,908.8
Operating income (loss)                         810.2    (389.8)     320.4     (562.1)     271.7      698.7     688.2    (614.3)
Income (loss) from continuing operations
  before income taxes                           604.7    (729.8)      86.7     (781.1)      14.6      370.9     301.3  (1,425.6)
Income (loss) from continuing operations
  before extraordinary items and changes
  in accounting principles                      387.0    (834.5)      57.2     (627.3)      12.1      286.3     166.3  (1,520.2)
Net income (loss)                               387.0    (834.5)      45.1     (624.6)     100.5      565.4     361.2  (1,393.3)
Dividends on preferred shares                   106.5     111.1      120.8      120.3      120.1      121.6     122.1     121.2
Earnings (loss) on common shares                280.5    (945.6)     (75.7)    (744.9)     (19.6)     443.8     239.1  (1,514.5)
Earnings (loss) from continuing operations
  per common share
    Basic                                        1.11     (5.20)      (.37)     (4.37)      (.63)      1.01       .27    (10.16)
    Diluted                                      1.06     (5.20)      (.37)     (4.37)      (.63)       .92       .27    (10.16)
Financial position.(2)
Working capital                              $  234.2  $  309.1   $  663.4   $   67.8   $1,012.2   $  677.5  $  509.8  $  380.8
Total assets                                  5,577.7   5,591.3    6,967.1    7,113.2    7,193.4    7,349.4   7,322.1   8,218.7
Long-term debt                                1,105.2   1,438.3    2,271.4    1,533.3    1,864.1    2,025.0   2,172.8   2,694.6
Common stockholders' equity(3)                   97.0    (214.2)     166.7      275.4    1,019.7    1,042.8     527.3     327.6
Common stockholders' equity per share             .38      (.86)       .95       1.61       5.96       6.12      3.26      2.03
Other data
Research and development                     $  296.6  $  302.3   $  342.9   $  404.5   $  458.5   $  489.3  $  505.6  $  610.6
Capital additions of properties                 207.3     179.9      162.3      195.0      208.2      173.5     227.0     222.7
Investment in marketable software                99.4     132.9      116.2      123.0      121.3      118.7     110.2     167.7
Depreciation                                    145.7     156.0      182.0      203.0      226.2      252.0     311.4     412.1
Amortization
  Marketable software                           111.8      97.0      101.6      151.7      150.5      144.6     131.8     241.0
  Goodwill                                        8.9     963.9       46.1       40.9       36.9       36.7      36.8     246.6
Common shares outstanding (millions)            256.6     249.5      174.8      171.4      171.0      170.4     161.9     161.7
Stockholders of record (thousands)               28.6      37.3       39.2       41.5       45.3       47.8      51.7      54.6
Employees (thousands)                            33.2      32.6       32.9       37.4       37.8       38.2      41.7      46.4
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1)  Includes special pretax charges of $1,039.2 million, $846.6 million, $186.2
     million, and $1,200.0 million for the years ended December 31, 1997, 1995,
     1994, and 1991, respectively.

(2)  See Note 4 of the Notes to Consolidated Financial Statements concerning 
     adjustments of previously reported amounts.

(3)  After deduction of cumulative preferred dividends in arrears in 1991, 1992,
     and 1993.


                                      62





<PAGE>
 
                                                                      Exhibit 23
                        Consent of Independent Auditors
We consent to the use of our report dated January 14, 1999 (except for the
fourth paragraph of Note 16, as to which the date is January 21, 1999), included
in the 1998 Annual Report to Stockholders of Unisys Corporation, with respect to
the consolidated financial statements, as amended, incorporated by reference in 
this Form 10-K/A.

Our audits also included the financial statement schedule of Unisys Corporation 
listed in Item 14(a). This schedule is the responsibility of Unisys 
Corporation's management. Our responsibility is to express an opinion based on 
our audits. In our opinion, the financial statement schedule referred to above, 
when considered in relation to the basic financial statements taken as whole, 
presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the following Registration
Statements: (1) Registration Statement (Form S-8 No. 33-7893) pertaining to the
Burroughs LTIP, (2) Registration Statement (Form S-8 No. 33-4317) pertaining to
the Burroughs 1985 Payroll Deduction Stock Purchase Plan, (3) Registration
Statement (Form S-3 No. 33-25715) of Unisys Corporation, (4) Registration
Statement
 (Form S-8 No. 33-3937) pertaining to the Burroughs LTIP, (5)
Registration Statement (Form S-8 No. 2-63842) pertaining to the Burroughs LTIP,
(6) Registration Statement (Form S-8 No. 33-38711) pertaining to the Unisys
Savings Plan, (7) Registration Statement (Form S-8 No. 33-38712) pertaining to
the Unisys Retirement Investment Plan II, (8) Registration Statement (Form S-8
No. 33-38713) pertaining to the Unisys Retirement Investment Plan, (9)
Registration Statement (Form S-8 No. 33-40259) pertaining to the Unisys LTIP,
(10) Registration Statement (Form S-3 No. 33-51747) of Unisys Corporation, (11)
Registration Statement (Form S-3 No. 333-20373) of Unisys Corporation, (12)
Registration Statement (Form S-3 No. 333-51885) of Unisys Corporation, (13)
Registration Statement (Form S-8 No. 333-51887) pertaining to the Unisys LTIP,
(14) Registration Statement (Form S-8 No. 333-51889) pertaining to the Unisys
Global Employee Stock Purchase Plan and (15) Registration Statement (Form S-8
No. 333-73399) pertaining to the Unisys Deferred Compensation Plan for
Executives; of our report dated January 14, 1999 (except for the fourth
paragraph of Note 16, as to which the date is January 21, 1999), with respect to
the consolidated financial statements, as amended, incorporated herein by
reference and our report included in the preceding paragraph with respect to the
financial statement schedule included in this Form 10-K/A.

/s/ ERNST & YOUNG LLP
Philadephia, Pennsylvania

July 14, 1999
 



<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                             803
<SECURITIES>                                         0
<RECEIVABLES>                                      951
<ALLOWANCES>                                      (65)
<INVENTORY>                                        561
<CURRENT-ASSETS>                                 2,887
<PP&E>                                           1,774
<DEPRECIATION>                                   1,193
<TOTAL-ASSETS>                                   5,591
<CURRENT-LIABILITIES>                            2,577
<BONDS>                                          1,438
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                      1,420
<COMMON>                                             3
<OTHER-SE>                                       (217)
<TOTAL-LIABILITY-AND-EQUITY>                     5,591
<SALES>                                          2,846
<TOTAL-REVENUES>                                 6,636
<CGS>                                            1,523
<TOTAL-COSTS>                                    4,373
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                    10
<INTEREST-EXPENSE>                                 233
<INCOME-PRETAX>                                  (730)
<INCOME-TAX>                                       105
<INCOME-CONTINUING>                              (835)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     (835)
<EPS-BASIC>                                   (5.20)
<EPS-DILUTED>                                   (5.20)
        

</TABLE>






<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                           1,029
<SECURITIES>                                         6
<RECEIVABLES>                                    1,051
<ALLOWANCES>                                      (80)
<INVENTORY>                                      (642)
<CURRENT-ASSETS>                                 3,133
<PP&E>                                           1,950
<DEPRECIATION>                                   1,328
<TOTAL-ASSETS>                                   6,967
<CURRENT-LIABILITIES>                            2,470
<BONDS>                                          2,271
<PREFERRED-MANDATORY>                              150
<PREFERRED>                                      1,420
<COMMON>                                             2
<OTHER-SE>                                         165
<TOTAL-LIABILITY-AND-EQUITY>                     6,967
<SALES>                                          2,427
<TOTAL-REVENUES>                                 6,371
<CGS>                                            1,707
<TOTAL-COSTS>                                    4,259
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     2
<INTEREST-EXPENSE>                                 250
<INCOME-PRETAX>                                     87
<INCOME-TAX>                                        30
<INCOME-CONTINUING>                                 57
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                   (12)
<CHANGES>                                            0
<NET-INCOME>                                        45
<EPS-BASIC>                                    (.44)
<EPS-DILUTED>                                    (.44)
        

</TABLE>