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

Overview

The company's first-quarter 2009 financial results were impacted by the challenging global economic environment and the negative effect of foreign currency exchange on revenue and gross margins. First-quarter 2009 revenue declined 15% over the year-ago quarter. Foreign exchange rates had an approximately 10 percentage-point negative impact on revenue in the quarter. While the company reported progress in reducing expenses and improving operating margins in its services business in the quarter, this reduction in expenses was more than offset by lower revenue, particularly in the company's technology business.

For the first quarter of 2009, the company reported operating profit of $22.0 million compared with an operating profit of $28.0 million in the year-ago period. Services operating profit percent was 2.7% for the first quarter compared with an operating profit percent of 2.3% in the year-ago period. For the first quarter of 2009, the company reported a tax provision of $15.6 million compared with a tax provision of $23.9 million in the year-ago period. For the three months ended March 31, 2009, the company reported a net loss attributable to Unisys Corporation of $24.4 million, or $.07 per share, compared with a net loss attributable to Unisys Corporation of $23.4 million, or $.07 per share, for the three months ended March 31, 2008.

Results of operations

Company results

Revenue for the quarter ended March 31, 2009 was $1.10 billion compared with $1.30 billion for the first quarter of 2008, a decrease of 15% from the prior year. Foreign currency fluctuations had a 10-percentage-point negative impact on revenue in the current period compared with the year-ago period. Services revenue declined 13% and Technology revenue declined 29% in the current quarter compared with the year-ago period. U.S. revenue was up slightly in the first quarter compared with the year-ago period, principally driven by increases in Federal government revenue. International revenue decreased 27% in the current quarter principally due to declines in Europe, Brazil and Japan. On a constant currency basis, international revenue declined 10% in the three months ended March 31, 2009 compared with the three months ended March 31, 2008.

15 For the three months ended March 31, 2009 pension income was $2.9 million compared with pension income of $11.5 million for the three months ended March 31, 2008. The decrease in pension income in 2009 from 2008 was principally due to lower 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.

Total gross profit margin was 20.3% in the three months ended March 31, 2009 compared with 22.5% in the three months ended March 31, 2008. The decrease in gross profit margin principally reflects the decline in revenue which more than offset the benefits derived in 2009 from the prior-year cost reduction actions.

Selling, general and administrative expense in the three months ended March 31, 2009 was $173.6 million (15.8% of revenue) compared with $232.5 million (17.9% of revenue) in the year-ago period. The decrease in selling, general and administrative expense reflects the benefits derived in 2009 from the prior- years' cost reduction actions as well as foreign currency exchange fluctuations.

Research and development (R&D) expenses in the first quarter of 2009 were $27.4 million compared with $32.7 million in the first quarter of 2008. The decrease in R&D expenses in 2009 compared with 2008 principally reflects changes in the company's development model as the company has focused its investments on value- added software and services while partnering with outside companies on hardware and systems design and development.

For the first quarter of 2009, the company reported an operating profit of $22.0 million compared with an operating profit of $28.0 million in the first quarter of 2008.

Interest expense for the three months ended March 31, 2009 was $21.8 million compared with $21.6 million for the three months ended March 31, 2008.

Other income (expense), net was an expense of $6.7 million in the first quarter of 2009, compared with expense of $1.1 million in 2008. The increase in expense was principally due to foreign exchange losses of $7.0 million in the three months ended March 31, 2009 compared with losses of $.3 million in the three months ended March 31, 2008.

Income (loss) before income taxes for the three months ended March 31, 2009 was a loss of $6.5 million compared with income of $5.3 million in 2008. The provision for income taxes was $15.6 million in the current quarter compared with a provision of $23.9 million in the year-ago period. The current quarter provision for income taxes includes the favorable impact of a tax rate change of $1.1 million, a U.S. refundable credit of $2.0 million and a foreign tax refund of $2.7 million related to a 2008 refund claim. As discussed in note
(l) of the Notes to Consolidated Financial Statements, 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.

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.

16 Also included in the Technology segment's sales and operating income are sales of hardware and software sold to the Services segment for internal use in Services engagements. The amount of such profit included in operating income of the Technology segment for the three months ended March 31, 2009 and 2008 was $1.5 million and $5.5 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.

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

                                       Elimi-
                            Total      nations      Services    Technology
                           -------     -------      --------    ----------
Three Months Ended
March 31, 2009
------------------
Customer revenue          $1,099.9                 $  983.8     $ 116.1
Intersegment                           $ (37.9)         1.7        36.2
                          --------     -------      -------      ------
Total revenue             $1,099.9     $ (37.9)    $  985.5     $ 152.3
                          ========    ========     ========     =======

Gross profit percent          20.3%                    16.2%       33.2%
                          ========                  =======      ======
Operating profit
  (loss) percent               2.0%                     2.7%      (11.7)%
                          ========                  =======      ======


Three Months Ended
March 31, 2008
------------------
Customer revenue          $1,301.3                 $1,137.1     $ 164.2
Intersegment                           $ (43.7)         2.7        41.0
                          --------     -------      -------      ------
Total revenue             $1,301.3     $ (43.7)    $1,139.8     $ 205.2
                          ========     ========     ========     =======

Gross profit percent          22.5%                    18.5%       42.9%
                          ========                  =======      ======
Operating profit percent       2.2%                     2.3%         .8%
                          ========                  =======      ======

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

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

                                    Three Months
                                   Ended March 31
                                 ------------------      Percent
                                   2009       2008        Change
                                   ----       ----       --------
    Services
     Systems integration
       and consulting            $  339.5    $ 344.1       (1.3)%
     Outsourcing                    425.4      494.5      (14.0)%
     Infrastructure services        142.2      201.7      (29.5)%
     Core maintenance                76.7       96.8      (20.8)%
                                 --------   --------
                                    983.8    1,137.1      (13.5)%
    Technology
     Enterprise-class servers        79.6      128.8      (38.2)%
     Specialized technologies        36.5       35.4         3.1%
                                 --------   --------
                                    116.1      164.2      (29.3)%
                                 --------   --------
    Total                        $1,099.9   $1,301.3      (15.5)%
                                 ========   ========

In the Services segment, customer revenue was $983.8 million for the three months ended March 31, 2009 down 13.5% from the three months ended March 31, 2008. Foreign currency translation had an 11-percentage-point negative impact on Services revenue in the current quarter compared with the year-ago period.

Revenue from systems integration and consulting decreased 1.3% from $344.1 million in the March 2008 quarter to $339.5 million in the March 2009 quarter.

Outsourcing revenue decreased 14.0% for the three months ended March 31, 2009 to $425.4 million compared with the three months ended March 31, 2008, as both information technology outsourcing (ITO) and business processing outsourcing (BPO) declined.

Infrastructure services revenue declined 29.5% for the three month period ended March 31, 2009 compared with the three month period ended March 31, 2008. The decline was due to weakness in demand for network design and consulting projects, the shift of project-based infrastructure work to managed outsourcing contracts and the company's shift away from low-margin project work.

Core maintenance revenue declined 20.8% in the current quarter compared with the prior-year quarter. The company expects the secular decline of core maintenance to continue.

Services gross profit was 16.2% in the first quarter of 2009 compared with 18.5% in the year-ago period, reflecting the lower revenue level. Services operating income percent was 2.7% in the three months ended March 31, 2009 compared with 2.3% in the three months ended March 31, 2008. The increase in Services operating profit margin was principally due to the benefits derived from the cost reduction actions.

In the Technology segment, customer revenue was $116.1 million in the current quarter compared with $164.2 million in the year-ago period for a decrease of 29.3%. Foreign currency translation had a negative impact of approximately 6- percentage points on Technology revenue in the current period compared with the prior-year period. The decline in Technology revenue in 2009 reflects lower sales of high-end mainframe systems, primarily in Japan, as clients deferred planned purchases in a weak economic environment, as well as the expiration of a royalty from Nihon Unisys Limited (NUL). 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. The expiration of this royalty from NUL contributed about 9 percentage points of the technology segment's 29% decline in revenue.

Revenue from the company's enterprise-class servers, which includes the company's ClearPath and ES7000 product families, decreased 38.2% for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. As mentioned above, technology sales during the quarter slowed as clients tightened spending on information technology projects due to economic concerns. Also contributing to the decrease in revenue was the secular decline in the enterprise-class server market, which the company expects to continue.

18 Revenue from specialized technologies, which includes third-party technology products and the company's payment systems products, increased 3.1% for the three months ended March 31, 2009 compared with the three months ended March 31, 2008.

Technology gross profit was 33.2% in the current quarter compared with 42.9% in the year-ago quarter. Technology operating income percent (loss) percent was
(11.7)% in the three months ended March 31, 2009 compared with .8% in the three months ended March 31, 2008. The declines in gross profit and operating profit margin in 2009 compared with 2008 reflect the lower levels of mainframe sales, primarily in Japan, and loss of the NUL royalty.

New accounting pronouncements

See note (j) of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.

Financial condition

The company's principal sources of liquidity are cash on hand, cash from operations and its U.S. trade accounts receivable facility, which is discussed below. The company's anticipated future cash expenditures include contributions to its defined benefit pension plans and payments in respect of cost-reduction actions. The company also has a revolving credit facility, which expires on May 31, 2009 that provides for loans and letters of credit up to an aggregate of $275 million. Given the global economic slowdown and resultant tight credit markets, the company does not plan to renew or replace this facility before its expiration. As discussed below, on April 30, 2009, the company announced that it had commenced a private offer to exchange its outstanding senior notes, including its $300 million 6 7/8% senior notes due in March 2010 (the 2010 Notes), in a private placement for new senior secured notes due in 2014. The company's ability to successfully complete this exchange could be affected by credit market conditions. As of March 31, 2009, the $300 million of 2010 Notes has been classified as a current liability. The volatility and disruption in financial markets could also impact the company's ability to utilize surety bonds, letters of credit, foreign exchange derivatives and other financial instruments the company uses to conduct its business. In addition to actions to reduce its cost structure, the company will continue to focus on working capital management and to tightly manage capital expenditures. Given these actions and its cash on hand at March 31, 2009, the company believes that it will have adequate sources of liquidity to meet its expected near-term cash requirements.

Cash and cash equivalents at March 31, 2009 were $468.7 million compared with $544.0 million at December 31, 2008. The decline was primarily due to the use of $61.2 million of cash to collateralize letters of credit as discussed below. The $61.2 million has been reported in the company's consolidated balance sheet in "Other long-term assets."

During the three months ended March 31, 2009, cash provided by operations was $39.3 million compared with cash usage of $49.3 million for the three months ended March 31, 2008. Cash expenditures in the current quarter related to cost- reduction actions (which are included in operating activities) were approximately $26.7 million compared with $21.4 million for the prior-year quarter. Cash expenditures for prior year cost-reduction actions are expected to be approximately $34.1 million for the remainder of 2009, resulting in an expected cash expenditure of approximately $60.8 million in 2009 compared with $60.4 million in 2008.

Cash used for investing activities for the three months ended March 31, 2009 was $109.0 million compared with cash usage of $94.6 million during the three months ended March 31, 2008. Items affecting cash used for investing activities were the following: Net purchases of investments were $.1 million for the three months ended March 31, 2009 compared with net purchases of $29.3 million in the prior-year period. Proceeds from investments and purchases of investments represent derivative financial instruments used to manage the company's currency exposure to market risks from changes in foreign currency exchange rates. The amount of proceeds and purchases of investments has declined significantly from last year, principally reflecting the fact that in the fourth quarter of 2008, the company capitalized certain intercompany balances for foreign subsidiaries which reduced the need for these derivatives. During the three months ended March 31, 2009, the company used $61.2 million of cash to collateralize letters of credit (see below). In addition, in the current quarter, the investment in marketable software was $15.5 million compared with $22.4 million in the year-ago period, capital additions of properties were $9.9 million in 2009 compared with $14.6 million in 2008 and capital additions of outsourcing assets were $21.9 million in 2009 compared with $27.9 million in 2008. The company has announced that it plans to reduce capital expenditures from $294.5 million in 2008 to approximately $200 - $225 million in 2009.

19 Cash provided by financing activities during the three months ended March 31, 2009 was $.1 million compared with $200.8 million of cash used during the three months ended March 31, 2008. The decrease was principally due to the January 2008 redemption, at par, of all $200 million of the company's 7 7/8% senior notes due April 1, 2008.

At March 31, 2009, total debt was $1.06 billion, a decrease of $.2 million from December 31, 2008.

The company's revolving credit facility, which expires on May 31, 2009, provides for loans and letters of credit up to an aggregate of $275 million. As of March 31, 2009, there were no cash borrowings under the facility. The credit facility is secured by the company's assets, except that the collateral does not include accounts receivable that are subject to the receivables facility, U.S. real estate or the stock or indebtedness of the company's U.S. operating subsidiaries. Under the terms of the maturing facility, the lenders could require the company to cash collateralize the letters of credit outstanding under the facility beginning on March 2, 2009. The amount of letters of credit issued by these lenders collateralized at March 31, 2009 was $61.2 million. Borrowings under the facility bear interest based on short-term rates and the company's credit rating. The credit agreement contains customary representations and warranties, including no material adverse change in the company's business, results of operations or financial condition. It also contains financial covenants requiring the company to maintain certain interest coverage, leverage and asset coverage ratios and a minimum amount of liquidity, which could reduce the amount the company is able to borrow. The credit facility also includes covenants limiting liens, mergers, asset sales, dividends and the incurrence of debt. Events of default include nonpayment, failure to perform covenants, materially incorrect representations and warranties, change of control and default under other debt aggregating at least $25 million. If an event of default were to occur under the credit agreement, the lenders would be entitled to declare all amounts borrowed under it immediately due and payable. The occurrence of an event of default under the credit agreement could also cause the acceleration of obligations under certain other agreements and the termination of the company's U.S. trade accounts receivable facility, discussed below.

In addition, the company and certain international subsidiaries have access to uncommitted lines of credit from various banks.

On April 30, 2009, the company announced that it had commenced a private offer to exchange its 2010 Notes, its 8% senior notes due 2012, its 12 1/2% senior notes due 2016 (the 2016 Notes) and its 8 1/2% senior notes due 2015 (the 2015 Notes) in a private placement for up to $375 million aggregate principal amount of new 12 5/8% senior secured notes due 2014 (the New Secured Notes) to be issued by the company. The New Secured Notes will be guaranteed by Unisys Holding Corporation, a wholly-owned Delaware corporation that directly or indirectly holds the shares of substantially all of the company's foreign subsidiaries, and by the company's other current and future material U.S. subsidiaries. The New Secured Notes will be secured on a first-priority lien basis (subject to permitted prior liens) by substantially all of the company's assets, except (i) accounts receivable that are subject to one or more receivables facilities, (ii) real estate, (iii) the stock or indebtedness of the company's U.S. operating subsidiaries, (iv) cash or cash equivalents securing reimbursement obligations under letters of credit or surety bonds and
(v) certain other excluded assets. A portion of the assets that will secure the New Secured Notes are currently pledged in favor of lenders under the company's revolving credit facility discussed above. If the revolving credit facility has not yet expired in accordance with its terms, the company intends to terminate the facility on or prior to the date it issues the New Secured Notes. Concurrently with the exchange offer, the company is privately offering New Secured Notes to eligible holders of the 2015 Notes and the 2016 Notes. In order to participate in the exchange offer, holders of 2015 Notes and 2016 Notes must subscribe for New Secured Notes in the concurrent offering. It is a condition to the completion of the exchange offer that (i) notes representing at least 40% of the aggregate principal amount of the 2010 Notes have been tendered and (ii) a minimum of $200 million in aggregate principal amount of New Secured Notes be issuable upon the settlement of the exchange offer and the concurrent notes offering. The exchange offer will expire on May 28, 2009, unless it is extended or earlier terminated. There can be no assurance that the exchange offer and concurrent notes offering will be completed. The exchange offer, the concurrent offering and the New Secured Notes have not been and will not be registered under the Securities Act of 1933, as amended (the Securities Act), or any state securities laws. The company is not required to register to exchange the New Secured Notes for resale under the Securities Act, or the securities laws of any other jurisdiction and it is not required to offer to exchange the New Secured Notes for notes registered under the Securities Act or the securities laws of any other jurisdiction and it has no present intention to do so.

20 On May 16, 2008, the company entered into a three-year, U.S. trade accounts receivable facility. Under this facility, the company has agreed to sell, on an ongoing basis, through Unisys Funding Corporation I, a wholly owned subsidiary, up to $150 million of interests in eligible U.S. trade accounts receivable. Under the facility, receivables are sold at a discount that reflects, among other things, a yield based on LIBOR subject to a minimum rate. The facility includes customary representations and warranties, including no material adverse change in the company's business, assets, liabilities, operations or financial condition. It also requires the company to maintain a minimum fixed charge coverage ratio and requires the maintenance of certain ratios related to the sold receivables. The facility will be subject to early termination if, as of February 28, 2010, the 2010 Notes have not been refinanced or extended to a date later than May 16, 2011. Other termination events include failure to perform covenants, materially incorrect representations and warranties, change of control and default under debt aggregating at least $25 million. At March 31, 2009 and December 31, 2008, the company had sold $120 million and $141 million, respectively, of eligible receivables.

At March 31, 2009, the company has met all covenants and conditions under its various lending and funding agreements. The company expects to continue to meet these covenants and conditions.

The company currently expects to make cash contributions of approximately $90- $95 million to its worldwide, primarily non-U.S., defined benefit pension plans in 2009. In accordance with regulations governing contributions to U.S. defined benefit pension plans, the company is not required to fund its U.S. qualified defined benefit pension plan in 2009. Previously, the company had expected to be required to contribute a maximum of approximately $90 million of cash to its U.S. qualified defined benefit pension plan in 2010. Under recently clarified IRS regulations, the company does not expect to be required to make a cash contribution in 2010 to fund its U.S. qualified defined benefit pension plan.

The company may, from time to time, redeem, tender for, or repurchase its securities in the open market or in privately negotiated transactions depending upon availability, market conditions and other factors. The company has on file with the Securities and Exchange Commission an effective registration statement covering $440 million of debt or equity securities, which expires in May 2009 and enables the company to be prepared for future market opportunities. In November 2008, the company filed a registration statement for an additional $660 million of securities. This registration statement is not yet effective.

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. Forward-looking statements provide current expectations of future events and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "intends," "plans," "projects" and similar expressions may identify such forward-looking statements. 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. Factors that could affect . . .