MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The company's third-quarter 2008 financial results were impacted by economic uncertainties in its key commercial markets, particularly in financial services. As has been widely reported, worldwide financial markets have been experiencing disruptions in recent months, including, among other things, an overall decline in credit availability. The company's customers have reacted to tight credit conditions by reducing IT spending. In addition, the company saw a slowdown in its federal business in the quarter due to slower government spending. Reflecting these factors, the company's revenue declined 6% from the third quarter of 2007. Lower sales volume led to lower-than-expected operating margins in the company's services business and overall. However, the company reported improved operating margins in its technology business, driven by higher shipments of ClearPath mainframes.

Through nine months of 2008, the company reported significantly improved profitability and cash flow. Operating profit rose to $88.5 million for the first nine months of 2008 compared to $16.5 million for the first nine months of 2007. Year to date in 2008 the company has generated $116.4 million of operational cash flow compared with operational cash usage of $74.2 million over the first nine months of 2007.

RESULTS OF OPERATIONS
COMPANY RESULTS

Revenue for the three months ended September 30, 2008 was $1.31 billion compared with $1.39 billion for the three months ended September 30, 2007, a decrease of 6% from the prior year. The change was principally due to declines in revenue from financial services and weakness in Federal government revenue. Services revenue decreased 5% and Technology revenue decreased 9%. Foreign currency fluctuations had a 2-percentage-point positive impact on revenue in the current period compared with the year-ago period. U.S. revenue declined 8% in the third quarter compared with the year-ago period. International revenue declined 4% in the current quarter compared with the year-ago period principally due to declines in Europe and Asia/Pacific, offset in part by increases in Latin America. On a constant currency basis, international revenue declined 9% in the three months ended September 30, 2008 compared with the three months ended September 30, 2007.

During the three months ended September 30, 2008 and 2007, the company did not record additional cost reduction charges; however, a $2.0 million change in estimates was recorded as expense in the current quarter compared with a $1.7 million change in estimate recorded as income in the year-ago period.

For the three months ended September 30, 2008 pension income was $15.0 million compared with pension expense of $11.4 million for the three months ended September 30, 2007. The change in pension expense in 2008 from 2007 was principally due to increases in worldwide discount rates and prior years' higher returns on plan assets worldwide. The company records pension income or expense, as well as other employee-related costs such as payroll taxes and medical insurance costs, in operating income in the following income statement categories: cost of revenue; selling, general and administrative expenses; and research and development expenses. The amount allocated to each category is based on where the salaries of active employees are charged. The disruption in worldwide financial markets referred to above has also led to volatility in prices of securities and declining values of investments. This has impacted the market value of the company's defined benefit pension plan assets. If the market value of the investments of these plan assets does not improve significantly through the end of 2008, the company would most likely be required to record pension expense in 2009, increase funding in its international funds, and to fund its U.S. plan in 2010.

Total gross profit margin was 22.2% in the three months ended September 30, 2008 compared with 22.2% in the three months ended September 30, 2007. Gross profit margin reflects a decline in pension expense of $20.4 million (income of $11.6 million in 2008 compared with expense of $8.8 million in 2007).

16 Selling, general and administrative expenses were $218.4 million for the three months ended September 30, 2008 (16.6% of revenue) compared with $225.8 million (16.2% of revenue) in the year-ago period. Selling, general and administrative expense reflects a decline in pension expense of $4.5 million (income of $1.6 million in 2008 compared with expense of $2.9 million in 2007). In addition, during the three months ended September 30, 2008, the company reversed $13.2 million of previously-accrued compensation expense related to performance-based restricted stock units due to a change in the assessment of the achievability of the performance goals (see note (e)).

Research and development (R&D) expenses in the third quarter of 2008 were $35.7 million compared with $39.7 million in the third quarter of 2007. The company continues to invest in proprietary operating systems, enterprise server operating systems, middleware and in key programs within its industry practices. The reduction in R&D in 2008 compared with 2007 reflects the benefits derived in 2008 from the prior-years' cost reduction actions.

For the third quarter of 2008, the company reported an operating profit of $37.9 million compared with $43.6 million in the third quarter of 2007. The principal items affecting the comparison of 2008 with 2007 are discussed above.

Interest expense for the three months ended September 30, 2008 was $21.5 million compared with $18.5 million for the three months ended September 30, 2007. The increase in interest expense was primarily due to increased interest rates related to the refinancing in December 2007 of the $200 million 7 7/8% notes due 2008 with the company's $210 million 12 1/2% notes due 2016.

Other income (expense), net, which can vary from period to period, was an expense of $6.1 million in the third quarter of 2008, compared with expense of $19.3 million in 2007. The principal item impacting the change was that the prior year period included an expense of $10.7 million to settle an escheat audit.

Income before income taxes for the three months ended September 30, 2008 was income of $10.3 million compared with income of $5.8 million in 2007. The provision for income taxes was $45.0 million in the current quarter compared with $36.8 million in the year-ago period. The provision for income taxes in the current quarter includes a $4.1 million benefit related to provisions in the Housing and Economic Recovery Act of 2008, enacted on July 30, 2008, permitting certain research and alternative minimum tax (AMT) credit carryforwards to be refundable. Included in the third quarter provision for income taxes is a $7.8 million charge for understatement of the income tax provision for the first and second quarters of 2008 in the amount of $4.7 million and $3.1 million, respectively. This charge had no effect on the year to date provision for income taxes. In addition, the provision for income taxes in the prior-year period includes a provision of $8.9 million due to a reduction in the UK income tax rate. The rate reduction from 30% to 28% was enacted in the third quarter of 2007 effective April 1, 2008. The provision of $8.9 million was caused by a write down of the UK deferred tax assets to the 28% rate.

The net loss for the three months ended September 30, 2008 was $34.7 million, or $.10 per share, compared with a net loss of $31.0 million, or $.09 per share, for the three months ended September 30, 2007.

As discussed in note (l), the company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The company will record a tax provision or benefit for those international subsidiaries that do not have a full valuation allowance against their deferred tax assets. Any profit or loss recorded for the company's U.S. operations will have no provision or benefit associated with it. As a result, the company's provision or benefit for taxes will vary significantly quarter to quarter depending on the geographic distribution of income.

Revenue for the nine months ended September 30, 2008 was $3.95 billion compared with $4.12 billion for the nine months ended September 30, 2007, a decrease of 4% from the prior year. This decrease was due to a 3% decrease in Services revenue and a 13% decrease in Technology revenue. Foreign currency fluctuations had a 4-percentage-point positive impact on revenue in the current period compared with the year-ago period. On a constant currency basis, international revenue declined 8% in the nine months ended September 30, 2008 compared with the nine months ended September 30, 2007.

For the nine months ended September 30, 2008 pension income was $35.3 million compared with pension expense of $33.4 million for the nine months ended September 30, 2007.

17 Total gross profit margin was 22.5% in the nine months ended September 30, 2008 compared with 21.0% in the nine months ended September 30, 2007. Included in the gross profit margin in 2007 were cost reduction charges of $32.3 million. Gross profit margin in 2008 reflects a decline in pension expense of $52.4 million (income of $27.3 million in 2008 compared with expense of $25.1 million in 2007).

Selling, general and administrative expenses were $701.9 million for the nine months ended September 30, 2008 (17.8% of revenue) compared with $717.8 million (17.4% of revenue) in the year-ago period. Included in selling, general and administrative expense in 2008 was $7.5 million of expense related to a lease guarantee (see note (b)). In addition, during the three months ended September 30, 2008, the company reversed $13.2 million of previously-accrued compensation expense related to performance-based restricted stock units due to a change in the assessment of the achievability of the performance goals (see note (e)). Included in 2007 were cost reduction charges of $18.6 million. Selling, general and administrative expense in 2008 also reflects a decline in pension expense of $11.9 million (income of $2.8 million in 2008 compared with expense of $9.1 million in 2007).

Research and development (R&D) expenses in the first nine months of 2008 were $98.6 million compared with $131.6 million in the first nine months of 2007. Included in R&D expense in 2007 were cost reduction charges of $15.9 million. The reduction in R&D in 2008 compared with 2007 excluding these charges principally reflects the benefits derived in 2008 from the prior-years' cost reduction actions.

For the first nine months of 2008, the company reported an operating profit of $88.5 million compared with an operating profit of $16.5 million in the first nine months of 2007. The principal items affecting the comparison of 2008 with 2007 are discussed above.

Interest expense for the nine months ended September 30, 2008 was $64.3 million compared with $56.1 million for the nine months ended September 30, 2007. The increase in interest expense was primarily due to increased interest rates related to the refinancing discussed above.

Other income (expense), net was an expense of $23.9 million for the nine months ended September 30, 2008, compared with an expense of $2.5 million in 2007. Other income (expense) for the nine months ended September 30, 2007 principally reflects a gain of $23.4 million on the sale of the company's media business (see note (d)), as well as an expense of $10.7 million to settle an escheat audit.

Income (loss) before income taxes for the nine months ended September 30, 2008 was income of $.3 million compared with a loss of $42.1 million in 2007. The provision for income taxes was $72.4 million in the current period compared with $50.8 million in the year-ago period. Included in the current period tax provision is a benefit of $5.1 million related to prior years' intercompany royalties. The provision for income taxes in the current period also includes a $4.1 million benefit related to provisions in the Housing and Economic Recovery Act of 2008 permitting certain research and AMT credit carryforwards to be refundable. The tax provision in the prior year nine-month period included a $39.4 million benefit related to the Netherlands income tax audit settlement (see note (d)) and $8.9 million related to the U.K. income tax rate change (discussed above).

For the nine months ended September 30, 2008, the company reported a net loss of $72.1 million, or $.20 per share, compared with a net loss of $92.9 million, or $.27 per share, for the nine months ended September 30, 2007. The prior year nine-month period includes pretax charges relating to cost reduction actions of $66.0 million.

SEGMENT RESULTS

The company has two business segments: Services and Technology. Revenue classifications by segment are as follows: Services - systems integration and consulting, outsourcing, infrastructure services and core maintenance; Technology - enterprise-class servers and specialized technologies.

The accounting policies of each business segment are the same as those followed by the company as a whole. Intersegment sales and transfers are priced as if the sales or transfers were to third parties. Accordingly, the Technology segment recognizes intersegment revenue and manufacturing profit on hardware and software shipments to customers under Services contracts. The Services segment, in turn, recognizes customer revenue and marketing profit on such shipments of company hardware and software to customers. The Services segment also includes the sale of hardware and software products sourced from third parties that are sold to customers through the company's Services channels. In the company's consolidated statements of income, the manufacturing costs of products sourced from the Technology segment and sold to Services customers are reported in cost of revenue for Services.

18 Also included in the Technology segment's sales and operating profit are sales of hardware and software sold to the Services segment for internal use in Services agreements. The amount of such profit included in operating income of the Technology segment for the three months ended September 30, 2008 and 2007 was $21.9 million and $14.4 million, respectively. The amount for the nine months ended September 30, 2008 and 2007 was $33.1 million and $16.2 million, respectively. The profit on these transactions is eliminated in Corporate. The company evaluates business segment performance on operating profit exclusive of cost reduction charges and unusual and nonrecurring items, which are included in Corporate. All other corporate and centrally incurred costs are allocated to the business segments, based principally on revenue, employees, square footage or usage. Therefore, the segment comparisons below exclude the cost reduction items mentioned above.

Information by business segment is presented below (in millions of dollars):

                                       Elimi-
                            Total      nations      Services    Technology
                           -------     -------      --------    ----------
Three Months Ended
September 30, 2008
------------------
Customer revenue          $1,312.4                 $1,152.1     $ 160.3
Intersegment                  -        $ (67.5)         4.0        63.5
                          --------     -------      -------      ------
Total revenue             $1,312.4     $ (67.5)    $1,156.1     $ 223.8
                          ========     =======      ========    =======
Gross profit percent          22.2%                    17.6%       47.5%
                          ========                  =======      ======
Operating profit percent       2.9%                     3.1%       11.0%
                          ========                  =======      ======

Three Months Ended
September 30, 2007
------------------
Customer revenue          $1,393.1                  $1,217.6     $175.5
Intersegment                  -        $(61.2)           3.4       57.8
                          --------     -------      --------     ------
Total revenue             $1,393.1     $(61.2)      $1,221.0     $233.3
                          ========     =======      ========     ======
Gross profit percent          22.2 %                    17.7 %     44.6 %
                          ========                  ========     ======
Operating profit percent       3.1 %                     3.6 %      4.0 %
                          ========                  ========     ======

Customer revenue by classes of similar products or services, by segment, is presented below (in millions of dollars):

                                    Three Months
                                   Ended Sept. 30         Percent
                                 ------------------      Increase
                                   2008       2007      (Decrease)
                                   ----       ----       ----------
Services
 Systems integration
   and consulting                $  361.2    $ 379.2       (4.7)%
 Outsourcing                        515.0      523.9       (1.7)%
 Infrastructure services            182.1      208.6      (12.7)%
 Core maintenance                    93.8      105.9      (11.4)%
                                 --------   --------
                                  1,152.1    1,217.6       (5.4)%
Technology
 Enterprise-class servers           141.3      133.9        5.5 %
 Specialized technologies            19.0       41.6      (54.3)%
                                 --------   --------
                                    160.3      175.5       (8.7)%
                                 --------   --------
Total                            $1,312.4   $1,393.1       (5.8)%
                                 ========   ========

In the Services segment, customer revenue was $1.15 billion for the three months ended September 30, 2008 down 5.4% from the three months ended September 30, 2007. Foreign currency translation had a 3-percentage-point positive impact on Services revenue in the current quarter compared with the year-ago period.

19 Revenue from systems integration and consulting decreased 4.7% from $379.2 million in the September 2007 quarter to $361.2 million in the September 2008 quarter.

Outsourcing revenue decreased 1.7% for the three months ended September 30, 2008 to $515.0 million compared with the three months ended September 30, 2007 principally due to a decline in business process outsourcing revenue.

Infrastructure services revenue declined 12.7% for the three month period ended September 30, 2008 compared with the three month period ended September 30, 2007 due to weakness in demand for network design and consulting projects and the shift of project-based infrastructure work to managed outsourcing contracts, all of which is expected to continue.

Core maintenance revenue declined 11.4% in the current quarter compared with the prior-year quarter. The decline in core maintenance was due to the secular decline in core maintenance as well as lower maintenance on high-volume, high- margin check sorting equipment. The company expects the secular decline of core maintenance to continue.

Services gross profit was 17.6% in the third quarter of 2008 compared with 17.7% in the year-ago period. Services operating profit percent was 3.1% in the three months ended September 30, 2008 compared with 3.6% in the three months ended September 30, 2007. Services margins in 2008 reflect a decline in pension expense in gross profit of $20.0 million (income of $11.1 million for the three months ended September 30, 2008 compared with expense of $8.9 million in the year-ago period) and a decline in pension expense in operating income of $23.6 million (income of $12.4 million for the three months ended September 30, 2008 compared with expense of $11.2 million in the year-ago period).

In the Technology segment, customer revenue was $160 million in the current quarter compared with $176 million in the year-ago period for a decrease of 8.7%. The decline in Technology revenue reflects the ending of certain NUL revenue beginning in the June 2008 quarter due to expiration of the one-time fixed royalty fee of $225 million under an agreement executed in 2005. The company had recognized revenue of $18.8 million per quarter ($8.5 million in enterprise-class servers and $10.3 million in specialized technologies) under this royalty agreement over the three-year period ended March 31, 2008. Excluding the expiration of this royalty from NUL, the technology segment's revenue would have increased 2%. Foreign currency translation had a positive impact of approximately 4-percentage points on Technology revenue in the current period compared with the prior-year period.

Revenue for the company's enterprise-class servers, which includes the company's ClearPath and ES7000 product families, increased 5.5% for the three months ended September 30, 2008 compared with the three months ended September 30, 2007. The increase was principally due to growth in ClearPath revenue as the company closed several significant second-half deals in the current quarter. Notwithstanding this increase, the company still expects the secular decline of enterprise-class servers to continue for the full year of 2008 and beyond, with ClearPath revenue expected to be down significantly in the fourth quarter of 2008 against the fourth quarter of 2007, which had strong mainframe sales.

Revenue from specialized technologies, which includes the company's payment systems products, third-party technology products and royalties from the company's agreement with NUL, decreased 54.3% for the three months ended September 30, 2008 compared with the three months ended September 30, 2007. The decline was principally due to the ending of the NUL royalties, discussed above, as well as lower payment systems and third-party revenue.

Technology gross profit was 47.5% in the current quarter compared with 44.6% in the year-ago quarter. Technology operating profit percent was 11.0% in the three months ended September 30, 2008 compared with an operating profit percent of 4.0% in the three months ended September 30, 2007. These margin improvements reflected the stronger ClearPath sales and revenue mix in the current quarter.

20 Information by business segment is presented below (in millions of dollars):

                                       Elimi-
                            Total      nations      Services    Technology
                           -------     -------      --------    ----------
Nine Months Ended
September 30, 2008
------------------
Customer revenue          $3,953.7                 $3,486.2     $ 467.5
Intersegment                  -        $(162.2)         9.4       152.8
                          --------     -------      -------      ------
Total revenue             $3,953.7     $(162.2)    $3,495.6     $ 620.3
                          ========     =======      =======     =======
Gross profit percent          22.5%                    18.4%       43.4%
                          ========                  =======      ======
Operating profit
  percent                      2.2%                     2.9%        3.1%
                          ========                  =======      ======

Nine Months Ended
September 30, 2007
------------------
Customer revenue          $4,116.8                  $3,579.1     $537.7
Intersegment                  -        $(148.7)         10.9      137.8
                          --------     -------      --------     ------
Total revenue             $4,116.8     $(148.7)     $3,590.0     $675.5
                          ========     =======      ========     ======
Gross profit percent          21.0%                     16.7%      43.7%
                          ========                  ========     ======
Operating profit
  percent                      0.4%                      1.7%       2.4%
                          ========                  ========     ======

Gross profit percent and operating income percent are as a percent of total revenue.

Customer revenue by classes of similar products or services, by segment, is presented below (in millions of dollars):

                                     Nine Months
                                   Ended Sept. 30         Percent
                                 ------------------      Increase
                                   2008       2007      (Decrease)
                                   ----       ----       ----------
Services
 Systems integration
   and consulting                $1,094.7   $1,092.6         .2 %
 Outsourcing                      1,529.7    1,497.7        2.1 %
 Infrastructure services            575.7      667.4      (13.7)%
 Core maintenance                   286.1      321.4      (11.0)%
                                 --------   --------
                                  3,486.2    3,579.1       (2.6)%
Technology
 Enterprise-class servers           384.7      411.8       (6.6)%
 Specialized technologies            82.8      125.9      (34.2)%
                                 --------   --------
                                    467.5      537.7      (13.1)%
                                 --------   --------
Total                            $3,953.7   $4,116.8       (4.0)%
                                 ========   ========

In the Services segment, customer revenue was $3.49 billion for the nine months ended September 30, 2008, down 2.6% from the nine months ended September 30, 2007. Foreign currency translation had a 3-percentage-point positive impact on Services revenue in current period compared with the year-ago period.

Revenue from systems integration and consulting of $1,094.7 million for the nine months ended September 30, 2008 was flat when compared with $1,092.6 million for the nine months ended September 30, 2007.

Outsourcing revenue of $1,529.7 million for the nine months ended September 30, 2008 increased 2.1% when compared with $1,497.7 million for the nine months ended September 30, 2007.

Infrastructure services revenue decreased 13.7% for the nine month period ended September 30, 2008 compared with the nine month period ended September 30, 2007 due to weakness in demand for network design and consulting projects and the shift of project-based infrastructure work to managed outsourcing contracts, all of which is expected to continue.

21 Core maintenance revenue declined 11.0% in the current period compared with the prior-year period. The company expects the secular decline of core maintenance to continue.

Services gross profit was 18.4% in the first nine months of 2008 compared with 16.7% in the year-ago period. Services operating profit percent was 2.9% in the nine months ended September 30, 2008 compared with 1.7% in the nine months ended September 30, 2007. Services margins in 2008 reflect a decline in pension expense in gross profit of $51.1 million (income of $25.7 million for the nine months ended September 30, 2008 compared with expense of $25.4 million in the year-ago period) and a decline in pension expense in operating income of $60.8 million (income of $27.8 million for the nine months ended September 30, 2008 compared with expense of $33.0 million in the year-ago period).

In the Technology segment, customer revenue was $468 million in the current period compared with $538 million in the year-ago period for a decrease of 13.1%. The decline in Technology revenue reflects the NUL revenue decline of $18.8 million per quarter beginning in the June 2008 quarter, as discussed above. Foreign currency translation had a positive impact of approximately 4- percentage points on Technology revenue in the current period compared with the prior-year period.

Revenue for the company's enterprise-class servers, which includes the company's ClearPath and ES7000 product families, decreased 6.6% for the nine months ended . . .