ELECTRONIC DATA SYSTEMS CORP /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 1999

Commission File No. 01-11779

[LOGO OF EDS]

ELECTRONIC DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 75-2548221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5400 Legacy Drive, Plano, Texas 75024-3199
(Address of principal executive offices, including ZIP code)

Registrant's telephone number, including area code: (972) 604-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
London Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of February 29, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price on such date as
reported on the New York Stock Exchange Composite Transactions) was
approximately $30,098,288,901.

There were 467,160,438 shares of the registrant's common stock outstanding as of
February 29, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2000, are incorporated by reference in Part
III.

PART I

ITEM 1. BUSINESS

Electronic Data Systems Corporation ("EDS") was incorporated in
Delaware in 1994 and, at the time of its split-off from General Motors
Corporation ("GM") in 1996, became the successor to the business and operations
of the Texas corporation that had been incorporated under the same name in 1962.
In 1984, GM acquired all of the capital stock of the Texas corporation, which
prior to that time had been an independent, publicly held corporation. As a
result of the split-off, EDS once again became an independent publicly held
corporation with its Common Stock listed for trading on the New York and London
Stock Exchanges. Unless the context otherwise requires, references in this Form
10-K to EDS include its predecessor and subsidiaries.

EDS has been a leader in the global information technology, or IT,
services industry for more than 37 years. We deliver high-value consulting,
electronic business solutions, business process management, and systems and
technology expertise to thousands of business and government clients around the
world. As of December 31, 1999, we employed approximately 121,000 persons. Our
principal executive offices are located at 5400 Legacy Drive, Plano, Texas,
75024, telephone number: (972) 604-6000.

In 1999, we announced the reorganization of our business on a global
basis, effective January 1, 2000, along the following four lines of business:
Information Solutions, our IT outsourcing business; Business Process Management,
our business process management business; E.solutions, our electronic business
unit; and A.T. Kearney, our high value-added management consulting subsidiary.
In order to better leverage our industry expertise across our lines of business,
we also established the following Global Industry Groups: Communications;
Energy; Financial Services; Government; Health Care; Manufacturing, Retail; and
Travel and Transportation. These groups, which are not bound by geography, work
with our lines of business and client executive teams to most effectively
position us within our target markets.

Information Solutions

Information Solutions, our largest line of business, encompasses our
traditional IT outsourcing business. Information Solutions includes network and
system operations, data management, applications development and field services,
as well as Internet hosting and Web site management. Our capabilities help
clients align IT and operations with business strategy while ensuring
predictable performance and costs. We have been a leader in the IT services
industry for more than 37 years.

Our Information Solutions services include:

.Centralized Systems Management. We offer data processing services for
stand-alone, midrange or high-end systems physically located in one or
more controlled environments. This includes management services for
traditional application processing environments, as well as
specialized services such as Web site hosting and data warehousing.
These services help clients reduce risk; facilitate cost-effective
growth; improve delivery, efficiency and quality; and enhance client-
to-customer relationships.

.Distributed Systems Management. We offer end-to-end services to plan,
deploy, operate and refresh an enterprise's total distributed
processing capability. This includes traditional laptop and desktop
environments, as well as the emerging applications service provider
model supported by network-based applications (often referred to as
apps on taps). Benefits to clients for these services may include
reduced cost of ownership, increased return on investment,
transformation of PCs into information tools, increased speed to
market and enhanced flexibility in business operations.

.Communications Management. We define, develop and manage consistent
voice, video, data, multi-service and other global communications
services. These services facilitate electronic commerce, increase
competitiveness and market opportunities, and improve information
sharing through a client's supply and demand chain.

2

.Application Services. We offer applications development and management
services on an outsourced or out-tasked basis. These services range
from outsourcing of all application development and management to
implementation and management of EDS-owned or third party industry
applications. Benefits to clients for these services include reduced
costs, extended value of technology investments, information sharing
and enhanced ability to adapt to market changes.

Information Solutions accounted for a substantial majority of our
revenues in 1999, and we expect Information Solutions to continue to account for
a majority of our revenues in 2000.

Business Process Management

Business Process Management, or BPM, is the outsourcing of one or more
business processes or functions to an external provider to improve overall
business performance. EDS is a leader in the BPM market, offering services
designed to help clients enter new global markets, get products to market
faster, manage customer and supplier relationships, and reduce costs.

Our BPM services include:

.Financial Process Management. We offer a full range of scalable
services that enable clients to bridge the gap between paper and
electronic payment processing environments. Offerings include credit
card processing, ATM and kiosk transaction processing, debit and
gateway authorization, check processing, remittance processing,
mortgage and consumer loan processing, relocation services, and a wide
variety of document management services. Services are aimed at several
different types of clients, including banks and other lending
institutions, card issuing institutions, merchants and merchant
acquiring banks, as well as medium-to-large size billers from multiple
industries.

.Administrative Process Management. With more than 30 years of
experience, we provide end-to-end services for city, state and federal
programs that operate in conjunction with a program's overall strategy
to improve and increase efficiency. We provide solutions to improve
business processes around Medicaid and Medicare claims processing, red
light photo enforcement and false alarm detection services. Additional
services provided to the public sector include: decision support
services, fraud and abuse detection services, immunization and vaccine
services, child health care services and pharmacy benefit management
services. In the private sector, we provide business process
improvement services to clients to enhance and manage policyholder
services for insurance companies and banks.

.Customer Relationship Management. Our expert management of customer
interactions enables clients to develop individual customer
relationships, build brand loyalty, and improve customer acquisition,
retention and life-time value. We are a global leader in Customer
Relationship Management (CRM), supporting hundreds of clients with our
end-to-end capabilities across the areas of contact centers, database
and analytics, fulfillment, and distribution services. Together with
our other lines of business, we provide the full range of CRM services
- from management consulting and systems integration to ongoing
business process management and outsourcing.

E.solutions

In 1999, we established the E.solutions business unit to combine many
of our electronic business capabilities into a single business unit to address
this growing market. E.solutions includes the consulting, implementation and
solutions management capabilities of our former electronic business, CIO
Services, human performance, enterprise solutions and business intelligence
services units, as well as elements of the Systemhouse business that we acquired
in April 1999. E.solutions offers electronic business strategy, solutions
consulting, systems integration, implementation and hosting services on a global
basis. Substantially all of these capabilities are part of our systems and
technology services reportable business segment.

The E.solutions practice areas include the following:

.E.strategy and consulting. Transforms enterprises through E.strategy,
E.pmo (project management office), Web Universities and Training, and
E.industry solutions service lines.

3

.Interactive Architects. Delivers a full complement of Internet
capabilities and includes the E.design, E.marketing, E.apps and
E.communities service lines.

.E.platforms. Includes E.infrastructure, E.security, E.messaging, and
Web Hosting service lines.

.Digital Value Chain. Develops business integration solutions to
include Supply Chain Management, Enterprise Resource Planning,
Customer Relationship Management, Business Intelligence and Enterprise
Application Integration.

A.T. Kearney

A.T. Kearney, a leading global management consultancy, became a
subsidiary of EDS in 1995. The firm provides clients with high value-added
management consulting services, including strategy, e-Business services,
strategic information technology, organization and operations consulting, as
well as executive search services. A.T. Kearney addresses top management and CEO
issues through delivery of leading-edge solutions to complex problems.

A.T. Kearney serves clients through practice teams focused on major
industries, including automotive, consumer products, retail, financial
institutions, communications/high technology and energy, as well as aerospace
and defense, transportation, utilities, health care and pharmaceuticals.

A.T. Kearney's services include:

.Strategy Consulting. A.T. Kearney's global Strategy Practice includes
a broad spectrum of services from traditional corporate and business
unit strategy and industry restructuring to experience in performance
measurement and e.business strategy. The practice helps clients turn
strategy into action, viewing strategy as the design of the entire
business system and an integrated set of actions to continuously
create and redefine competitive advantage.

.E-Business Consulting. A.T. Kearney focuses on developing and
delivering the e-Business priorities within our client CEO's digital
marketplace agenda. Key issues addressed include e-competitive
strategy, digital supply chain, digital customer experience, and
e-technology strategy. Working in collaboration with the E.solutions
line of business, A.T. Kearney provides global clients end-to-end
e-Business capabilities to issues and strategies from insight through
implementation.

.Strategic Information Technology Consulting. A.T. Kearney's Strategic
IT Consulting Practice provides insight, planning and operational
improvement/implementation services for clients. The practice focuses
on technology enabled business transformation. It assists clients in
achieving business results by improving their ability to leverage and
use IT or formulating results-oriented business strategies in which IT
plays a central role.

.Organization Consulting. The Organization Consulting Practice focuses
on change management, enterprise transformation, business
re-engineering and HR management.

.Operations Consulting. A.T. Kearney's Operations Consulting Practice
involves all phases of operations, including sourcing, manufacturing,
supply chain management, and negotiations. It is linked with A.T.
Kearney's strategy, IT and industry practices.

Revenues

Our fees are generally paid pursuant to contracts with our clients.
These contracts may provide for both fixed and variable fee arrangements. The
terms of our client contracts generally range from less than one year in the
high-value consulting business to up to ten years in our IT outsourcing
business. Other than GM, no one client accounted for more than 5% of our total
revenues in any of the past three years. Approximately 42% of our 1999 revenues
were generated outside the United States.

4

Acquisitions, Strategic Alliances and Investments

From time to time, EDS has made acquisitions and entered into strategic
alliances in an effort to obtain a competitive advantage or a new or expanded
presence in targeted geographic or service markets. In April 1999, we acquired
the Systemhouse business from MCI WorldCom for approximately $1.6 billion in
cash. In January 2000, we announced the creation of a venture fund to facilitate
strategic investments in the Internet, e-commerce and the emerging
business-to-business (B2B) marketplace. We believe that acquisitions, strategic
alliances and investments will continue to be important to our ability to
compete effectively.

Competition

We experience competition in all four of our lines of business. Our
Information Solutions line of business faces competition principally from other
companies providing IT systems and services. The principal competitors of our
Information Solutions line of business are Andersen Consulting LLP, Computer
Sciences Corporation (CSC), International Business Machines Corporation (IBM)
and Perot Systems Corporation. The principal competitors of our business process
management line of business are First Data Corp., Fiserv Inc., Deluxe Corp.,
CSC, Consultec, Inc., Unisys Corp., Convergys Corp., Harte-Hanks and UPS
Logistics. Our E.solutions line of business competes with IBM and the "big five"
accounting firms, as well as a number of other emerging technology companies.
The Internet services and solutions consulting markets are converging as more
enterprises become extended enterprises and Internet service providers
increasingly enter the solutions consulting space, providing Web enablement and
enterprise systems integration. Principal competitors of A.T. Kearney include
Andersen Consulting LLP, Bain & Company, Booz Allen & Hamilton, Boston
Consulting Group and McKinsey & Company. In addition, all four of our lines of
business experience competition from numerous smaller, niche-oriented consulting
and other firms, such as Razorfish, Inc., USWeb/CKS-Whittman-Hart, Sapient
Corp., Exodus and Appnet.

Technology and its application within the business enterprise is in a
rapid and continuing state of change as new technologies continue to be
developed, introduced and implemented. We believe that to continue to compete
effectively we must be able to develop and market offerings that meet changing
user needs and respond to technological changes on a timely and cost-effective
basis.

Employees

As of December 31, 1999, we employed approximately 121,000 persons in
the United States and around the world. None of our U.S. employees is currently
employed under an agreement with a collective bargaining unit, and we believe
that our relations with employees are good. To maintain our technical expertise
and responsiveness to evolving client needs, we provide our employees with
extensive continuing education and training, as well as leadership and
professional development programs.

Patents, Proprietary Rights and Licenses

We hold a number of patents and pending patent applications in the
United States and other countries. Our policy generally is to pursue patent
protection that we consider necessary or advisable for the patentable inventions
and technological improvements of our business. We also significantly rely on
trade secrets; copyrights; technical expertise and know-how; continuing
technological innovations; and other means, such as confidentiality agreements
with employees, consultants and customers, to protect and enhance our
competitive position.

Some of our business areas are highly patent-intensive. Many of our
competitors have obtained, and may obtain in the future, patents that cover or
affect services or products directly or indirectly related to those that we
offer. We routinely receive communications from third parties asserting patent
or other rights covering our products and services. We may not be aware of all
patents containing claims that may pose a risk of infringement by our products
and services. In general, if one or more of our products or services infringe
patents held by others, we would be required to cease developing or marketing
such products or services, obtain licenses from the holders of the patents, or
redesign our products or services to avoid infringing the patent claims. There
is no assurance that we would be able to take any of such remedial actions or,
if we are able to do so, that the costs incurred would not be significant.

We are not aware of any pending patent or proprietary right disputes
that would have a material adverse effect on our consolidated financial position
or results of operations.

5

Regulation

Various aspects of our business are subject to governmental regulation
in the United States and other countries in which we operate. Failure to comply
with such regulation may, depending upon the nature of the noncompliance, result
in the suspension or revocation of any license or registration at issue, the
termination or loss of any contract at issue, or the imposition of contractual
damages, civil fines or criminal penalties. We have experienced no material
difficulties in complying with the various laws and regulations affecting our
business.

Services for General Motors

Approximately 19% of our total revenues in 1999 was attributable to GM
and its affiliates. We are the primary provider of data processing and other
information technology services for GM and certain of its affiliates worldwide,
including integrated information systems for payroll, health and benefits,
office automation, and plant automation functions. The loss of GM as an ongoing
major customer would have a material adverse effect on EDS.

Immediately prior to our split-off from GM in 1996, we entered into a
new Master Service Agreement, or MSA, with GM that serves as a framework for the
negotiation and operation of service agreements for certain "in-scope" IT
services (as defined in the MSA) we provide to GM on a worldwide basis. These
"in-scope" services accounted for approximately $3.0 billion of the $3.6 billion
of GM revenues in 1999. The remainder was attributable to goods and services
provided outside the scope of the MSA. Historical GM revenue shown above
excludes revenues from Delphi Automotive Systems Corporation, which was spun off
from GM in May 1999. At that time, we entered into a new five year master
services agreement with Delphi under which we continue to provide a myriad of
services to Delphi previously provided pursuant to the MSA with GM.

The term of the MSA will continue until 2006 and may be extended by
mutual agreement of the parties. In addition, the MSA may be terminated by GM if
there occurs a "change of control" of EDS and certain other conditions are met
(including a determination by GM's Board of Directors that there is substantial
uncertainty about EDS' ability to perform its obligations under the MSA or any
other significant threat to the business relationship between the parties).
Reference is made to the MSA, a copy of which has been filed with the SEC, for a
description of the other terms and conditions of that agreement, including
certain market testing procedures to test the competitiveness of the services we
provide thereunder.

ITEM 2. PROPERTIES

As of December 31, 1999, we operated approximately 400 locations in 41
states and 202 cities in the United States and 416 locations in 255 cities in 41
countries outside the United States. At such date, we owned approximately 4.3
million square feet of space and leased from third parties 23 million square
feet of space. Our global headquarters campus in Plano, Texas contains
approximately 3.5 million square feet of office and data center space. Other
than the 1.6 million square foot EDS Centre building, which we lease for an
initial term expiring in 2022 (which lease has certain fixed price purchase
options we may exercise during and at the end of such initial term), we own all
buildings and real estate comprising the Plano campus.

We operate large scale service management centers, or SMCs, in
locations throughout the United States and in Australia, Brazil, Canada, France,
Germany, the Netherlands, Spain and the United Kingdom. In addition, we operate
service delivery centers, or SDCs, at customer-owned sites or EDS-owned or
leased facilities throughout the world. SDCs usually support a single or small
number of customers with more specialized requirements than those supported at
the large scale, multiple customer SMCs. Our leased properties consist primarily
of office, warehouse, SDC and non-U.S. SMC facilities. Lease terms are generally
five years or, for leases related to a specific customer contract, have a term
concurrent with that contract. We do not anticipate any difficulty in obtaining
renewals or alternative space upon expiration of our existing leases. In
addition to our owned and leased properties, we occupy office space at customer
locations throughout the world. Such space is generally occupied pursuant to the
terms of the relevant customer contract.

We believe that our facilities are suitable and adequate for our
business. We periodically review our space requirements and consolidate and
dispose of or sublet facilities that we no longer require for our business and
acquire new space to meet the needs of our business.

6

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in various litigation matters
arising in the ordinary course of our business. We do not believe that
disposition of any current matter will have a material adverse effect on our
consolidated financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None submitted.

EXECUTIVE OFFICERS OF EDS

The following sets forth certain information with respect to the
executive officers of EDS as of February 29, 2000:

Richard H. Brown, 52, has been Chairman and Chief Executive Officer of
EDS since January 1999. He was Chief Executive Officer of Cable & Wireless plc
from July 1996 to December 1998 and President and Chief Executive Officer of H&R
Block, Inc., and Chairman of its CompuServe subsidiary, from May 1995 to July
1996. Mr. Brown was Vice Chairman of Ameritech Corporation from January 1993 to
May 1995 and President of its Illinois Bell subsidiary from 1990 to 1993. He
held various executive positions with United Telecommunications, Inc. from 1981
to 1990, most recently as Executive Vice President, and was with Ohio Bell from
1969 to 1981.

Jeffrey M. Heller, 60, has been the President and Chief Operating
Officer of EDS since June 1996 and a director of EDS since 1983. He has been the
Chairman of EDS' Unigraphics Solutions Inc. subsidiary since January 1999. Mr.
Heller was a Senior Vice President of EDS from 1984 until June 1996. He joined
EDS in 1968 and has served in numerous technical and management capacities.

Paul J. Chiapparone, 60, has been an Executive Vice President of EDS
since June 1996 and prior to that time had been a Senior Vice President since
April 1986. He has responsibility for our GM client on a global basis. Mr.
Chiapparone joined EDS in 1966 and has served in numerous management capacities.

James E. Daley, 58, has been Executive Vice President and Chief
Financial Officer of EDS since March 1999. Before joining EDS, he had been with
Price Waterhouse, L.L.P from 1963 to 1998, serving as its Co Chairman-Operations
from 1988 to 1995, Vice Chairman International from 1995 to 1996, Global ABS
Leader of Financial Services Industry Practices from 1997 to 1998, and as a
member of its Policy Board from 1984 to 1995, Management Committee from 1986 to
1996, World Board from 1988 to 1996 and World Firm Management Committee from
1988 to 1995.

Douglas L. Frederick, 50, has been President of EDS' Information
Solutions line of business since July 1999. Prior to joining EDS, he had served
as Executive Vice President, Baan Customer Initiatives, of the Baan Company, a
provider of enterprise business solutions, and Chairman and outside director of
the Bain Company, a software technology company, from April 1997 to July 1999.
Mr. Frederick was employed by The Boeing Company from 1979 to March 1997,
holding senior executive IT positions commencing in 1990.

John McCain, 40, has been President of EDS' E.Solutions line of
business since August 1999. He served as President of the E.Solutions consulting
group from May 1999 to July 1999. From December 1996 through April 1999, Mr.
McCain was head of EDS' CIO Services strategic business line, which unit
delivered technology based solutions, including Y2K services, around the world.
He served as Vice President of EDS' Consumer Products business unit from August
1994 through November 1996. Mr. McCain joined EDS in 1986 in its marketing
development program.

Kim McMann, 42, has been President of EDS' Business Process Management
line of business since October 1999. Prior to that time, she served as President
of EDS' State Business unit from July 1999 to September 1999, President of EDS'
State Health Care strategic business unit from September 1995 to July 1999, and
President of EDS' Commercial Services strategic business unit, which focused on
the U.S. retail industry, from July 1993 to September 1995. Ms. McMann began her
career with EDS in 1979.

7

Fred Steingraber, 61, is Chairman and CEO of A.T. Kearney, the
high-value management consultancy which became a subsidiary of EDS in August
1995. He joined A.T. Kearney more than 35 years ago and has served as its CEO
since 1983 and Chairman from 1985 to 1995 and since January 1999.

Troy W. Todd, 71, has been Executive Vice President - Leadership and
Change Management of EDS since April 1999, with responsibility for the company's
corporate communications, employee administration, executive compensation, and
professional and technical development functions. Prior to joining EDS, he
served in several senior management positions in the utilities and
telecommunications industries, including CEO of Cable & Wireless Panama
Telephone Company from June 1997 to March 1999, general manager of the Orlando
Utilities Commission from 1992 to 1995 and President and CEO of United Telephone
Company of Florida from 1982 to 1992.

Executive officers serve at the discretion of our Board of Directors.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "EDS." The table below shows the range of reported per share
sales prices on the NYSE Composite Tape for the Common Stock for the periods
indicated.

Calendar Year High Low
-----------------------------------------------------------------------
1998
First Quarter............................... $50.88 $40.50
Second Quarter.............................. 46.75 33.94
Third Quarter............................... 42.25 30.56
Fourth Quarter.............................. 51.31 30.44

1999
First Quarter............................... 53.94 44.13
Second Quarter.............................. 59.94 46.88
Third Quarter............................... 67.38 52.38
Fourth Quarter.............................. 70.00 47.88

The last reported sale price of the Common Stock on the NYSE on
February 29, 2000, was $64.50 per share. As of that date, there were
approximately 201,306 record holders of Common Stock.

EDS declared quarterly dividends on the Common Stock at the rate of
$.15 per share for each quarter of 1998 and 1999.

8

ITEM 6. SELECTED FINANCIAL DATA
(in millions, except per share amounts)

As of and for the Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------

Operating results
Revenues.................................... $18,534.2 $16,891.0 $15,235.6 $14,441.3 $12,422.1
Cost of revenues............................ 15,170.6 13,938.2 12,164.1 11,452.4 9,601.6
Selling, general and administrative......... 1,852.6 1,837.9 1,528.3 1,403.3 1,291.5
Restructuring and other charges............. 1,038.3 48.1 329.6 789.5 -
One-time split-off costs.................... - - - 45.5 -
Other income (expense)...................... 185.0 66.9 (72.0) (76.5) (62.0)
Provision for income taxes.................. 236.8 390.3 411.0 242.6 528.1
-------------------------------------------------------------------
Net income................................ $ 420.9 $ 743.4 $ 730.6 $ 431.5 $ 938.9
===================================================================
Per share data
Basic earnings per share
of common stock........................... $ 0.87 $ 1.51 $ 1.49 $ 0.89 $ 1.96
Diluted earnings per share
of common stock........................... 0.85 1.50 1.48 0.88 1.94
Cash dividends per share
of common stock.......................... 0.60 0.60 0.60 0.60 0.52

Financial position
Current assets.............................. $ 5,877.7 $ 5,633.3 $ 5,169.4 $ 4,945.2 $ 4,381.5
Property and equipment, net................. 2,459.8 2,708.1 2,868.4 3,097.0 3,242.4
Operating and other assets.................. 4,184.8 3,184.7 3,136.3 3,150.7 3,208.5
Total assets................................ 12,522.3 11,526.1 11,174.1 11,192.9 10,832.4
Current liabilities......................... 4,996.0 3,656.8 3,257.6 3,162.8 3,221.5
Long-term debt, less current portion........ 2,215.7 1,184.3 1,790.9 2,324.3 1,852.8
Redeemable preferred stock of
subsidiaries, minority interests, and
other long-term liabilities............... 507.8 405.9 341.4 493.3 39.9
Shareholders' equity........................ 4,534.6 5,916.5 5,309.4 4,783.1 4,978.5

9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

Electronic Data Systems Corporation, or EDS, is a professional services
firm that offers its clients a portfolio of related services worldwide within
the broad categories of systems and technology services, business process
management, management consulting, and electronic business. Services include the
management of computers, networks, information systems, information processing
facilities, business operations and related personnel. This discussion refers to
EDS and its consolidated subsidiaries.

Forward-Looking Statements

The statements in this discussion that are not historical statements
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements regarding estimated cost savings from our restructuring activities,
future operating margins, the impact of the renegotiation of certain sector
agreements with GM, future performance of our base, or non-GM, business, total
contract values for new business and other forward-looking financial
information. In addition, we have made in the past and may make in the future
other written or oral forward-looking statements, including statements regarding
future operating performance, short- and long-term revenue and earnings growth,
backlog and the value of new contract signings, and industry growth rates and
our performance relative thereto. Any forward-looking statement may rely on a
number of assumptions concerning future events and be subject to a number of
uncertainties and other factors, many of which are outside our control, that
could cause actual results to differ materially from such statements. These
include, but are not limited to: competition in the industries in which we
conduct business and the impact of competition on pricing, revenues and margins;
the financial performance of current and future client contracts, including
contracts with GM; with respect to client contracts accounted for under the
percentage-of-completion method of accounting, the performance of such contracts
in accordance with our cost and revenue estimates; our ability to improve
productivity and achieve synergies from acquired businesses; the degree to which
third parties continue to outsource information technology and business
processes; and the cost of attracting and retaining highly skilled personnel. We
are not obligated to update or revise any forward-looking statements whether as
a result of new information, future events or otherwise.

Results of Operations

Revenues. For the years ended December 31, 1999, 1998 and 1997, we
operated primarily in the following reportable segments: systems and technology
services, business process management, and management consulting services.
Systems and technology services encompasses systems development, systems
integration and systems management. Also included in this area are desktop
services, Year 2000 conversions and enterprise software solutions. Business
process management focuses on the use of technology to manage various business
processes within the client's enterprise, including such activities as
remittance processing, procurement logistics, customer relationship management,
customer service and training, as well as IT operations. Management consulting
services are provided by A.T. Kearney, an EDS subsidiary. Services in this area
provide clients with high value-added strategy, operations and IT capabilities
combined with implementation skills that improve overall business performance
and competitive positioning. In 1999, we announced the reorganization of our
business, effective January 1, 2000, into four business lines: Information
Solutions, our IT outsourcing business; Business Process Management, our
business process management business; E.solutions, our electronic business unit;
and A.T. Kearney, our high value-added management consulting subsidiary.

10

The following table displays the percentage of revenues by various
categories for the years ended December 31, 1999, 1998 and 1997:

Percentage of Revenues
---------------------------
1999 1998 1997
---------------------------

Reportable Segments:
Systems and technology services....................................................... 80% 77% 78%
Business process management........................................................... 14 15 13
Management consulting services........................................................ 6 7 6
All other............................................................................. - 1 3
---------------------------
Total.............................................................................. 100% 100% 100%
===========================

GM/Non-GM:
Non-GM clients........................................................................ 81% 79% 76%
GM and affiliates..................................................................... 19 21 24
---------------------------
Total.............................................................................. 100% 100% 100%
===========================

Geographies:
United States......................................................................... 58% 61% 65%
United Kingdom........................................................................ 11 11 10
All other, none greater than 10%...................................................... 31 28 25
---------------------------
Total.............................................................................. 100% 100% 100%
===========================

Total revenues increased 10% in 1999 to $18.5 billion, up from $16.9
billion in 1998, which represented an 11% increase over 1997 total revenues of
$15.2 billion. On May 28, 1999, Delphi Automotive Systems Corporation,
previously a wholly owned subsidiary of GM, was spun off from GM. For
comparative purposes in this discussion, revenues from contracts with Delphi in
both the current and prior periods have been classified as revenues from non-GM
clients. Revenues from non-GM clients grew 13% in 1999 to $14.9 billion,
compared with a 15% increase to $13.3 billion in 1998, up from $11.5 billion in
1997. Approximately one-half of the increase in revenues from non-GM clients in
1999 was attributable to Systemhouse, which was acquired in April 1999, while
the other half of the increase resulted from new contract signings. These
increases in revenues from non-GM clients were partially offset by decreases
resulting from the divestiture of certain business units and the discontinuation
of certain contracts to align service offerings with our four global lines of
business to capture synergies and further leverage our delivery platforms. As a
result of these strategic divestitures, we expect revenue growth, when compared
to the corresponding periods in 1999, to be stronger in the latter half of 2000
than in the first half of the year. Total revenues related to GM and its
affiliates were $3.6 billion, $3.6 billion and $3.7 billion in 1999, 1998 and
1997, respectively. The percentage of total revenues from GM and its affiliates
declined to 19% in 1999 from 21% in 1998 and 24% in 1997. We expect this trend
to continue as revenues from non-GM clients are anticipated to increase, while
revenues from GM are anticipated to decline in 2000. Revenues from non-GM
clients in 1998 included a negative adjustment of $200.0 million primarily as a
result of a legal dispute with a client. The negative impact of this adjustment
was partially offset by a gain of $69.0 million recorded to revenues resulting
from the sale of a portion of our leasing portfolio.

Other than GM, no client accounted for more than 5% of our total
revenues in 1999, 1998 or 1997.

Costs and expenses. Our gross margin percentage [(revenues less cost of
revenues)/revenues] increased to 18% in 1999 compared with 17% in 1998, which
decreased from 20% in 1997. As a result of our cost saving initiatives
implemented during 1999, we realized an improvement in our gross margins in the
latter half of the year. These improvements were partially offset by lower gross
margins in the first half of the year. The increase in 1999 was also due in part
to negative adjustments to revenues in 1998. See "Revenues" above. The decrease
in gross margins subsequent to 1997 was due primarily to a decrease in the gross
margin on contracts with GM. During 1999 and 1998, we incurred additional costs
necessary for the successful long-term support of our contracts with GM. In
addition, billing rates for certain services provided to GM decreased in 1999
and 1998, and commensurate cost reductions were not realized. Although the
declines in revenues related to these existing services were partially offset by
new contracts with GM for additional products and services, the gross margins on
these new contracts were lower than historical levels. The renegotiation of our
sector agreements with GM covering its North American operations and GMAC, which
became effective

11

January 1, 2000, is expected to adversely impact future revenues and margins
attributable to our contracts with GM. This negative impact on future margins is
expected to be offset by cost savings resulting from initiatives implemented in
1999 that are designed to improve future operating margins associated with
non-GM clients. See "Restructuring and other charges" below.

As a percentage of revenues, selling, general and administrative
("SG&A") expenses in 1999, 1998 and 1997 were 10%, 11% and 10%, respectively.
The increase in 1998 was due in part to the recognition of $49.4 million related
to the retirements of the former chairman and vice chairman. In addition, we
incurred incremental SG&A expenses during 1998 related to the improvement of
certain of our internal systems, the implementation of the SAP enterprise
resource process system, increased spending on employee development and a
management retention plan. We also experienced rapid growth in our A.T. Kearney
management consulting business, our Unigraphics Solutions Inc. software business
and our business process management line of business, each of which has
inherently higher SG&A costs as a percentage of revenues than traditional
systems and technology services. During 1999, we implemented plans designed to
improve operating margins, including decreasing SG&A as a percentage of
revenues. Cost savings realized from these initiatives were partially offset by
increased spending for marketing and branding, improvements to certain of our
internal systems, and other areas of strategic importance.

Restructuring and other charges. In the first quarter of 1999, we began
the implementation of initiatives designed to reduce costs, streamline our
organizational structure and exit certain operating activities. As a result of
these initiatives, we recorded restructuring charges and related asset
writedowns totaling $1.1 billion for the year ended December 31, 1999. Amounts
recorded for restructuring activities during 1999 provide for planned workforce
reductions of approximately 15,300 employees, consisting of approximately 3,200
employees who accepted our early retirement offer and the involuntary
termination of approximately 12,100 individuals employed throughout the company
in managerial, professional, clerical, consulting and technical positions. Total
involuntary termination and early retirement offer charges amounted to $866.5
million, $146.2 million of which pertains to a curtailment gain and special
termination benefits related to the early retirement offer, including amounts
under our defined benefit pension plan (see Note 13), and $51.3 million from
changes to the vesting conditions for unvested restricted stock units and
options (see Note 10). In addition, these initiatives have resulted in the exit
of certain business activities, the consolidation of facilities and the
writedown of certain assets to net realizable value. Charges associated with
these actions include $93.9 million relating to business exit and facilities
consolidation costs, and asset writedowns of $107.3 million. The accrual for
business exit activities and consolidation of facilities includes estimated
costs of $15.5 million to terminate software license agreements, $39.6 million
to terminate certain leases, $16.8 million to terminate certain customer
contracts and $22.0 million for other costs. These costs are associated with the
exit of several lines of business, primarily within systems and technology
services. Asset writedowns related to the restructuring activities consist of
$57.8 million to write-off software, goodwill and other intangibles, and $49.5
million for writedowns of computer-related equipment and other assets. Such
asset writedowns, which predominantly related to businesses that we have decided
to exit in the systems and technology, business process management and
consulting lines of business, were primarily determined based on the present
value of anticipated future cash flows.

As of December 31, 1999, approximately 7,400 employees left the company
through involuntary termination as a result of the 1999 initiatives, and
approximately $258.9 million of termination benefits have been charged to the
accrual. In addition, we paid approximately $35.0 million in connection with the
exit activities described above. We expect that remaining cash expenditures
relating to this charge will be incurred primarily in 2000.

During 1997, we implemented an enterprisewide business transformation
initiative to reduce our costs, streamline our organizational structure, and
align our strategy, services and delivery with market opportunities. This
initiative involved the elimination of approximately 8,500 positions through
reassignment of personnel, elimination of open personnel requisitions, normal
attrition and termination of employees. As a result of this initiative, we
recorded restructuring charges totaling $125.3 million, primarily relating to
the severance costs associated with the planned involuntary termination of
approximately 2,600 employees. In addition, we recorded asset writedowns of
$99.7 million relating to operations that we discontinued. These operations
primarily consisted of several processing centers that we consolidated and
certain product lines and related services provided to certain industries. Asset
writedowns relating to these product lines included investments; software,
goodwill and other intangibles; and buildings and computer equipment. We also
recorded asset writedowns of $104.6 million in 1997 and $27.8 million in 1998
primarily relating to operating assets initially identified for sale in 1997. As
of December 31, 1998, all such assets had been sold.

12

Restructuring activities in 1996 and 1997 resulted in the involuntary
termination of approximately 4,750 employees and the acceptance by approximately
1,750 employees of early retirement offers. These restructuring activities have
resulted in cash expenditures of $274.4 million since the beginning of the
second quarter of 1996. The restructuring actions contemplated under the 1996
and 1997 plans are essentially complete as of December 31, 1999, with remaining
restructuring reserves comprised primarily of future severance-related payments
to terminated employees, future lease payments for exited facilities and
accruals for other restructuring activities.

Expected cost savings resulting from our 1999 initiatives are
anticipated to play a significant role in our goal of achieving at least $1.0
billion in annualized compensation and other operating expense reductions, as
well as our goal of achieving an annualized 10% operating margin by the end of
the year 2000. These cost savings will be partially offset by increased spending
for marketing and branding, improvements to certain of our internal systems, and
other areas of strategic importance.

Solid Edge acquisition. On March 2, 1998, our then wholly owned
subsidiary Unigraphics Solutions Inc. ("UGS") completed the acquisition of
Intergraph Corporation's mechanical CAD/CAM business for a purchase price of
$105.0 million, excluding approximately $2.0 million of acquisition costs. In
connection with the allocation of the purchase price to identifiable intangible
assets, UGS allocated $42.5 million to in-process research and development
("R&D") that was expensed upon acquisition. The in-process R&D related to the
modification of Solid Edge Version 4.0 software to include UGS' Parasolid solid
modeling kernel software. This project commenced in July 1997 and was completed
in May 1998. Initial sales of Solid Edge Version 5.0 ("Solid Edge 5.0") occurred
shortly thereafter. The value assigned to in-process R&D was determined based on
estimates of the resulting net cash flows from Solid Edge 5.0 and the
discounting of such cash flows to present value.

In projecting net cash flows resulting from Solid Edge 5.0, management
estimated revenues, cost of sales, R&D, SG&A and income taxes for the software.
These estimates were based on the following assumptions:

. Estimated revenues projected a compound annual growth rate over five
years of approximately 46%, with annual growth rates ranging from 33%
to 75%. Virtually all projected revenues were ascribed to Solid Edge
5.0 because the integration of the Parasolid solid modeling kernel
software into Solid Edge 4.0 was the critical enabling factor to allow
the Solid Edge product to provide the geometric modeling capabilities
and user interfaces necessary to compete with other products in the
product design and consumer products markets. In addition, management
expected sales of Solid Edge 4.0 to cease subsequent to May 1998.
Projections of revenue growth were based on management's estimates of
market size and growth, supported by independent market data and by the
nature and expected timing of the development of product enhancements
and new products by UGS and its competitors.

. The estimated cost of sales as a percentage of revenue (11-12%) was
consistent with the historical rates for the Solid Edge business as
well as industry standards.

. Estimated SG&A costs were expected to increase as a percentage of
sales, from 37% in 1998 to 45% in 2002. Incremental sales in later
years were expected to require proportionally greater selling efforts
to meet revenue growth plans.

. The estimated R&D costs were expected to decrease as a percentage of
sales, from 22% in 1998 to 12% in 2002. R&D costs in 1998 were higher
as a percentage of sales than projected for later years due to the
costs of combining two R&D departments in 1998 and the continuing R&D
efforts.

. Royalty income on the Parasolid solid modeling kernel software was
expected to be received by UGS from outside persons. The royalty income
associated with Solid Edge 5.0 was assumed to be 6%, the standard
royalty rate for the Parasolid solid modeling kernel software. Due to
the declining value of Solid Edge 5.0 over the future periods, the
royalty income associated with Solid Edge 5.0, to determine the R&D
valuation, is reduced accordingly from 6.0% in 1998 to 3.7% in 2002.

13

The projected net cash flows for Solid Edge 5.0 were discounted using a
15% weighted-average cost of capital ("WACC") based upon an analysis of the WACC
for publicly traded companies within UGS' industry. The calculation produces the
average required rate of return of an investment in an operating enterprise. A
WACC of 15% was also used to determine the value of the return on working
capital and return on work force acquired as part of the purchase of Solid Edge.
In determining the appropriate WACC, UGS considered the attribution of a higher
WACC to the in-process technology due to the risks inherent in the development
process; however, a higher WACC was not used because these risks had been
significantly reduced by the acquisition date (as evidenced by the completion of
the development in early May 1998). In addition, the impact of the use of a
higher WACC (e.g., 16-20%) on the amount of the purchase price allocated to
in-process R&D was not material.

Revenues of Solid Edge 5.0 subsequent to the completion of development
are lower than those used in projected net cash flows for purchase price
allocation due to lower than expected sales performance on the part of U. S.
distributors and a three-month delay in the integration of Solid Edge
distribution channels into UGS' existing distribution network. In addition, R&D
expenses associated with Solid Edge 5.0 have also been lower than those used in
the net cash flow projection. As a result of the preceding factors, actual net
cash flows approximate those used in our original projection. Management
continues to believe that the original net cash flow projections for Solid Edge
5.0 are reasonable.

Other income (expense). The components of other income (expense) are
presented below for the years ended December 31, 1999, 1998 and 1997 (in
millions):

1999 1998 1997
-----------------------------
Interest and other income.............. $ 335.0 $ 148.6 $ 117.8
Interest expense....................... (150.0) (131.3) (189.8)
Gain on sale of stock of subsidiary.... - 49.6 -
-----------------------------
Total............................... $ 185.0 $ 66.9 $ (72.0)
=============================

Other income (expense) increased to $185.0 million in 1999, compared
with $66.9 million in 1998 and $(72.0) million in 1997. Interest and other
income increased $186.4 million in 1999, to $335.0 million, compared with $148.6
million in 1998, due primarily to the recognition of incremental gains resulting
from the sale of our limited partnership portfolio and the disposition of
certain investments. Interest and other income increased $30.8 million in 1998,
to $148.6 million, compared with $117.8 million in 1997, due primarily to
incremental gains resulting from sales of assets and additional income from
investments accounted for under the equity method of accounting. Interest
expense increased $18.7 million in 1999 to $150.0 million, compared with $131.3
million in 1998, due to additional borrowings used primarily to finance the
repurchase of our common stock and to partially fund the acquisition of
Systemhouse. See "Liquidity and Capital Resources" below. Interest expense
decreased $58.5 million to $131.3 million in 1998, compared with $189.8 million
in 1997, due to a reduced level of debt. Also included in other income (expense)
during 1998 was the recognition of a non-taxable gain of $49.6 million resulting
from the sale of stock in connection with UGS' initial public offering. No taxes
were provided for this gain as we believe we will recover our basis in the
shares sold in a tax-free manner.

Income taxes. The effective income tax rates in 1999, 1998 and 1997
were 36%, 34% and 36%, respectively.

Net income. Net income (including all charges, gains and adjustments
discussed above) decreased to $420.9 million in 1999, compared with $743.4
million in 1998 and $730.6 million in 1997. Basic earnings per share decreased
to $0.87 per share from $1.51 in 1998 and $1.49 in 1997. Diluted earnings per
share decreased to $0.85 per share in 1998 from $1.50 in 1998 and $1.48 in 1997.

As discussed above, during 1999 we recorded pre-tax restructuring and
other charges, net of the reversal of certain previously recorded accruals, of
$1.0 billion and recorded pre-tax gains of $199.5 million resulting from the
disposition of certain investments. Excluding these charges and gains, net
income for 1999 would have been $957.8 million, and basic and diluted earnings
per share would have been $1.97 and $1.92, respectively.

14

During 1998 we recorded certain pre-tax charges and adjustments,
including $49.4 million related to senior executive retirements, $42.5 million
for a writeoff associated with acquired in-process R&D, $27.8 million for asset
writedowns, and $200.0 million for revenue adjustments resulting primarily from
a legal dispute with a client. The negative impact of these items was partially
offset by a non-taxable gain of $49.6 million associated with the sale of stock
of UGS, a gain of $69.0 million related to the sale of a portion of our leasing
portfolio, and positive adjustments of $22.2 million to reverse residual
accruals related to previously recorded restructuring charges. Excluding these
charges, gains and adjustments, net income would have been $840.1 million, and
basic and diluted earnings per share would have been $1.71 and $1.70,
respectively.

Excluding pre-tax charges of $329.6 million in 1997 related to
restructuring activities and asset writedowns, net income would have been $941.6
million, and basic and diluted earnings per share would have been $1.92 and
$1.91, respectively.

The following table summarizes the adjustments discussed in the three
preceding paragraphs (dollars in millions, except per share amounts):

1999 1998 1997
--------------------------------------

Revenues - as reported..................................................... $18,534.2 $16,891.0 $15,235.6
Adjusting items:
Contract revenue adjustments......................................... - 200.0 -
Sale of portion of leasing portfolio ................................ - (69.0) -
--------------------------------------
Revenues - pro forma....................................................... 18,534.2 17,022.0 15,235.6
--------------------------------------

Costs and expenses - as reported........................................... 18,061.5 15,824.2 14,022.0
Adjusting items:
Restructuring activities/related asset writedowns.................... (1,038.3) 22.2 (225.0)
Senior executive retirements......................................... - (49.4) -
Write-off of acquired in-process R&D................................. - (42.5) -
Certain other asset writedowns....................................... - (27.8) (104.6)
--------------------------------------
Costs and expenses - pro forma............................................. 17,023.2 15,726.7 13,692.4
--------------------------------------

Operating income - pro forma............................................... 1,511.0 1,295.3 1,543.2
--------------------------------------

Other income (expense) - as reported....................................... 185.0 66.9 (72.0)
Adjusting items:
Gain on disposition of certain investments........................... (199.5) - -
Gain on sale of stock of subsidiary.................................. - (49.6) -
--------------------------------------
Other income (expense) - pro forma......................................... (14.5) 17.3 (72.0)
--------------------------------------

Income before income taxes - pro forma..................................... 1,496.5 1,312.6 1,471.2
Provision for income taxes - pro forma..................................... 538.7 472.5 529.6
--------------------------------------
Net income - pro forma..................................................... $ 957.8 $ 840.1 $ 941.6
======================================
Earnings per share - pro forma
Basic................................................................... $ 1.97 $ 1.71 $ 1.92
======================================
Diluted................................................................. $ 1.92 $ 1.70 $ 1.91
======================================

15

Percentage of completion. We may from time to time modify our
contractual arrangements with clients. For client contracts accounted for under
the percentage-of-completion method, such changes would be reflected in results
of operations as a change in accounting estimate in the period the revisions are
determined.

Seasonality and inflation. Our revenues and net income vary over the
calendar year, with the fourth quarter generally reflecting the highest revenues
and net income for the year due to certain services that are purchased more
heavily in that quarter as a result of the spending patterns of several clients.
In addition, revenues generally increase from quarter to quarter as a result of
new business added throughout the year. Inflation generally had little effect on
our results of operations during the past three years.

Financial Position

Assets. Total assets increased to $12.5 billion at December 31, 1999,
up from $11.5 billion at December 31, 1998, due primarily to the acquisition of
Systemhouse. At December 31, 1999, we held cash and cash equivalents of $537.2
million, had working capital of $881.7 million and a current ratio of 1.2-to-1.
This compares with cash and cash equivalents of $1.0 billion, $2.0 billion in
working capital, and a current ratio of 1.5-to-1 at December 31, 1998.

Liabilities and shareholders' equity. Total debt increased to $2.9
billion at December 31, 1999, from $1.4 billion at December 31, 1998. Total debt
consists of notes payable, commercial paper and redeemable preferred stock of
subsidiaries. The increase in total debt in 1999 was attributable to additional
borrowings used primarily to finance the repurchase of our common stock and to
partially fund the acquisition of Systemhouse. During 1999, we repurchased
approximately 27 million shares of our common stock at a cost of approximately
$1.5 billion. This repurchase is intended to serve as a hedge against our
long-term exposure with respect to outstanding options and restricted stock
units. To fund this repurchase, we completed the sale during October 1999 of
$500.0 million in principal amount of our 6.850% Notes due 2004, $700.0 million
in principal amount of our 7.125% Notes due 2009, and $300.0 million in
principal amount of our 7.450% Notes due 2029. The purchase of Systemhouse for
approximately $1.6 billion was financed approximately 50% with cash and 50% with
debt. The total debt-to-capital ratio (which includes total debt as a component
of capital) was 38.9% and 19.3% at December 31, 1999 and 1998, respectively. The
ratio of non-current debt-to-capital (which includes non-current debt as a
component of capital) was 34.5% and 18.7% at December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, we had committed lines of credit of
$1.3 billion and $2.5 billion, respectively, all of which was unused. These
lines of credit serve as backup for our commercial paper borrowings.

New Accounting Standards

In June 1999, Statement of Financial Accounting Standards ("SFAS") No.
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, was issued. SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The provisions of this statement are now effective for financial statements for
fiscal years beginning after June 15, 2000, although early adoption is allowed.
We plan to adopt the provisions of this SFAS on January 1, 2001. We do not
expect the adoption of this standard to have a material effect on our results of
operations or financial position.

Derivative Financial Instruments

We are exposed to market risk from changes in interest rates, equity
prices and foreign currency exchange rates. We enter into various hedging
transactions to manage this risk. We do not hold or issue derivative financial
instruments for trading purposes and are not a party to any leveraged derivative
transactions. A discussion of our accounting policies for financial instruments,
and further disclosure relating to financial instruments, are included in Note
12: "Financial Instruments and Risk Management."

16

Interest rate risk. Our earnings are affected by changes in short-term
interest rates as a result of the issuance of short-term commercial paper and
variable-rate notes. However, the effects of interest rate changes are reduced
by our management of our debt portfolio between fixed- and variable-rate
instruments as well as the utilization of interest rate swaps. Risk can be
estimated by measuring the impact of a near-term adverse movement of 10% in
short-term market interest rates. If these rates average 10% more in 2000 than
in 1999, there would be no material adverse impact on our results of operations
or financial position. During 1999, had short-term market interest rates
averaged 10% more than in 1998, there would have been no material adverse impact
on our results of operations or financial position.

Publicly traded equity price sensitivity. Our financial position is
affected by changes in publicly traded equity prices as a result of certain
investments. Risk can be estimated by measuring the impact of a near-term
adverse movement of 10% in the value of our publicly traded equity security
investments. If the market price of our investments in publicly traded equity
securities in 2000 were to fall by 10% below the level at the end of 1999, there
would be no material adverse impact on our results of operations or financial
position. During 1999, had the market price of our investments in publicly
traded equity securities fallen by 10% below the end of 1998, there would have
been no material adverse impact on our results of operations or financial
position.

Foreign exchange risk. We conduct business in the United States and
around the world. Our most significant foreign currency transaction exposures
relate to Canada, the United Kingdom, those Western European countries who use
the euro as a common currency, Australia and New Zealand. The Company has
entered into forward foreign exchange contracts primarily to hedge amounts due
from and the net assets of selected subsidiaries denominated in foreign
currencies against fluctuations in exchange rates. We have not entered into
forward foreign exchange contracts for speculative or trading purposes. In 1999,
we discontinued the use of a value-at-risk model to assess the foreign exchange
market risk of derivative instruments in favor of a one-to-one matching of
contracts against exposures. Our accounting policies for these contracts are
based on our designation of the contracts as hedging transactions. The criteria
we use for designating a contract as a hedge include the contract's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. We enter into foreign currency forward
contracts with durations of generally less than twelve months to hedge such
transactions.

Gains and losses related to hedges of firm commitments or other
transactions qualifying for hedge accounting treatment are deferred in accrued
liabilities and recognized in earnings at the time of recognition of the
underlying hedged transaction. All other foreign exchange contracts are
marked-to-market on a current basis. To the extent hedges of firm commitments
are no longer effective as hedges of the underlying transaction, they are
closed, with gains and losses recognized in earnings on a current basis. In
addition, since we enter into forward contracts only as a hedge, any change in
currency rates would not result in any material gain or loss, as any gain or
loss on the underlying foreign denominated balance would be offset by the gain
or loss on the forward contract. Risk can be estimated by measuring the impact
of a near-term adverse movement of 10% in foreign currency rates against the
U.S. dollar. If these rates averaged 10% more in 2000 than in 1999, there would
be no material adverse impact on our results of operations or financial
position. During 1999, had foreign currency rates averaged 10% more than in
1998, there would have been no material adverse impact on our results of
operations or financial position.

Liquidity and Capital Resources

For the years ended December 31, 1999, 1998 and 1997, net cash provided
by operating activities was $2.1 billion, $2.1 billion, and $2.2 billion,
respectively. The decrease in 1998 as compared with 1997 was due primarily to a
decrease in net income prior to non-cash items.

For the year ended December 31, 1999, net cash used in investing
activities increased $1.1 billion from 1998, to $1.9 billion, due primarily to
payments related to the acquisition of Systemhouse and a decrease in proceeds
from divestitures, partially offset by a decrease in payments for the purchase
of property, plant and equipment and investments and other assets, as well as
from increased proceeds from the sale of investments and other assets. For the
year ended December 31, 1998, net cash used in investing activities decreased
$469.2 million from 1997, to $778.8 million, due primarily to proceeds from
divestitures.

17

For the year ended December 31, 1999, net cash used in financing
activities decreased $387.0 million, to $554.4 million, compared with $941.4
million in 1998, due primarily to a net increase in proceeds from long-term debt
partially offset by funds used to repurchase our common stock. For the year
ended December 31, 1998, net cash used in financing activities decreased $188.4
million, to $941.4 million, compared with $1.1 billion in the prior year, due
primarily to a decrease in the amount of reduction of debt. We paid cash
dividends totaling $291.4 million, $295.3 million and $293.8 million in 1999,
1998 and 1997, respectively.

We expect that the principal use of funds for the foreseeable future
will be for capital expenditures and working capital. Capital expenditures may
consist of purchases of computer and telecommunications equipment, buildings and
facilities, land, and software, as well as acquisitions and joint ventures. We
estimate that gross capital expenditures during 2000, excluding acquisition and
joint venture activities as well as anticipated proceeds from divestitures, will
be approximately $1.0 billion. Total capital expenditures for 2000 will depend
to a significant extent on the level of our acquisition and joint venture
activities, capital requirements for new business and proceeds from
divestitures. We anticipate that cash reserves, cash flows from operations and
unused borrowing capacity under the existing lines of credit will provide
sufficient funds to meet our needs for at least the next year.

ITEM 8. Financial Statements and Supplementary Data

Index to Financial Statements and Financial Statement Schedule Page

Independent Auditors' Report.................................... 19

Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997............................. 20

Consolidated Balance Sheets as of December 31, 1999 and 1998.... 21

Consolidated Statements of Shareholders' Equity and
Comprehensive Income as of and for the years ended
December 31, 1999, 1998 and 1997............................. 22

Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997....................... 23

Notes to Consolidated Financial Statements...................... 24

Financial Statement Schedule II - Valuation and
Qualifying Accounts.......................................... 51

18

Independent Auditors' Report

The Board of Directors
Electronic Data Systems Corporation:

We have audited the accompanying consolidated balance sheets of
Electronic Data Systems Corporation and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we have also audited the related financial
statement schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Data Systems Corporation and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ KPMG LLP

KPMG LLP
Dallas, Texas
February 1, 2000

19

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)

Years Ended December 31,
------------------------------------------
1999 1998 1997
------------------------------------------

Revenues............................................................................. $ 18,534.2 $ 16,891.0 $ 15,235.6
------------------------------------------

Costs and expenses
Cost of revenues................................................................ 15,170.6 13,938.2 12,164.1
Selling, general and administrative............................................. 1,852.6 1,837.9 1,528.3
Restructuring and other charges (Note 18)....................................... 1,038.3 48.1 329.6
------------------------------------------
Total costs and expenses..................................................... 18,061.5 15,824.2 14,022.0
------------------------------------------
Operating income............................................................. 472.7 1,066.8 1,213.6
------------------------------------------
Other income (expense)
Interest expense and other, net................................................. 185.0 17.3 (72.0)
Gain on sale of stock of subsidiary (Note 8).................................... - 49.6 -
------------------------------------------
Total other income (expense)................................................. 185.0 66.9 (72.0)
------------------------------------------
Income before income taxes................................................... 657.7 1,133.7 1,141.6
Provision for income taxes........................................................... 236.8 390.3 411.0
------------------------------------------
Net income................................................................... $ 420.9 $ 743.4 $ 730.6
==========================================
Basic earnings per share of common stock............................................. $ 0.87 $ 1.51 $ 1.49
==========================================
Diluted earnings per share of common stock........................................... $ 0.85 $ 1.50 $ 1.48
==========================================

See accompanying notes to consolidated financial statements.

20

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)

December 31,
-----------------------
1999 1998
-----------------------

ASSETS
Current assets
Cash and cash equivalents..................................................................... $ 537.2 $ 1,038.8
Marketable securities......................................................................... 191.5 272.9
Accounts receivable, net...................................................................... 4,423.4 3,835.0
Prepaids and other............................................................................ 725.6 486.6
-----------------------
Total current assets....................................................................... 5,877.7 5,633.3
-----------------------
Property and equipment, net........................................................................ 2,459.8 2,708.1
-----------------------
Operating and other assets
Investments and other assets.................................................................. 1,483.6 1,717.6
Software, goodwill and other intangibles, net................................................. 2,701.2 1,467.1
-----------------------
Total operating and other assets........................................................... 4,184.8 3,184.7
-----------------------
Total assets............................................................................ $12,522.3 $11,526.1
=======================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities...................................................... $ 3,690.7 $ 2,840.9
Deferred revenue.............................................................................. 718.3 593.3
Income taxes.................................................................................. 93.4 174.9
Current portion of long-term debt............................................................. 493.6 47.7
-----------------------
Total current liabilities.................................................................. 4,996.0 3,656.8
-----------------------
Deferred income taxes.............................................................................. 268.2 362.6
-----------------------
Long-term debt, less current portion............................................................... 2,215.7 1,184.3
-----------------------
Redeemable preferred stock of subsidiaries, minority interests, and other long-term liabilities.... 507.8 405.9
-----------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value; authorized 200,000,000 shares; none issued................... - -
Common stock, $.01 par value; authorized 2,000,000,000 shares;
493,415,265 shares issued at December 31, 1999; 493,131,404 shares
issued at December 31, 1998............................................................... 4.9 4.9
Additional paid-in capital.................................................................... 971.9 958.3
Retained earnings............................................................................. 5,179.2 5,049.7
Accumulated other comprehensive income........................................................ (79.7) (96.2)
Treasury stock, at cost, 27,222,631 and 7,160 shares at
December 31, 1999 and 1998, respectively................................................... (1,541.7) (0.2)
-----------------------
Total shareholders' equity.............................................................. 4,534.6 5,916.5
-----------------------
Total liabilities and shareholders' equity.......................................... $12,522.3 $11,526.1
=======================

See accompanying notes to consolidated financial statements.

21

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in millions)

Accumulated
Common Stock Other Treasury Stock
--------------------- Additional Compre- ----------------- Consolidated
Shares Paid-in hensive Retained Shares Shareholders'
Outstanding Amount Capital Income Earnings Held Amount Equity
-----------------------------------------------------------------------------------------

Balance at December 31, 1996.......... 487.2 $4.9 $682.8 $ (98.2) $4,200.6 0.4 $ (7.0) $4,783.1
Comprehensive income:
Net income...................... - - - - 730.6 - - 730.6
Currency translation adjustment. - - - (82.4) - - - (82.4)
Unrealized gains on securities,
net of tax effect of $14.7 and
reclassification adjustment... - - - 27.8 - - - 27.8
---------
Total comprehensive income...... 676.0
---------
Dividends declared................. - - - - (293.8) - - (293.8)
Stock award transactions........... 4.4 - 172.9 - - (0.4) 7.0 179.9
Preacquisition losses of a
previous cost basis investee.... - - - - (35.8) - - (35.8)
----------------------------------------------------------------------------------------

Balance at December 31, 1997.......... 491.6 4.9 855.7 (152.8) 4,601.6 - - 5,309.4
Comprehensive income:
Net income...................... - - - - 743.4 - - 743.4
Currency translation adjustment. - - - 5.3 - - - 5.3
Unrealized gains on securities,
net of tax effect of $34.3 and
reclassification adjustment... - - - 51.3 - - - 51.3
---------
Total comprehensive income...... 800.0
---------
Dividends declared................. - - - - (295.3) - - (295.3)
Stock award transactions........... 1.5 - 102.6 - - (2.2) 93.1 195.7
Purchase of treasury shares........ - - - - - 2.2 (93.3) (93.3)
----------------------------------------------------------------------------------------

Balance at December 31, 1998.......... 493.1 4.9 958.3 (96.2) 5,049.7 - (0.2) 5,916.5
Comprehensive income:
Net income...................... - - - - 420.9 - - 420.9
Currency translation adjustment. - - - (163.1) - - - (163.1)
Unrealized gains on securities,
net of tax effect of $146.5 and
reclassification adjustment... - - - 186.7 - - - 186.7
Minimum pension liability,
net of tax effect of $4.0..... - - - (7.1) - - - (7.1)
---------
Total comprehensive income...... 437.4
---------
Dividends declared................. - - - - (291.4) - - (291.4)
Stock award transactions........... 0.3 - 13.6 - - (7.4) 294.2 307.8
Purchase of treasury shares........ - - - - - 34.6 (1,835.7) (1,835.7)
----------------------------------------------------------------------------------------

Balance at December 31, 1999.......... 493.4 $4.9 $971.9 $ (79.7) $5,179.2 27.2 $(1,541.7) $4,534.6
========================================================================================

See accompanying notes to consolidated financial statements.

22

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------

Cash Flows from Operating Activities
Net income..................................................................... $ 420.9 $ 743.4 $ 730.6
---------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 1,435.8 1,393.7 1,208.5
Deferred compensation.................................................... 112.9 156.2 103.2
Asset writedowns......................................................... 129.2 70.3 204.3
Gain on sale of stock of subsidiary...................................... - (49.6) -
Other.................................................................... (222.4) (145.6) 83.9
Changes in operating assets and liabilities, net of
effects of acquired companies:
Accounts receivable................................................ 20.7 (129.3) (209.7)
Prepaids and other................................................. (88.7) (155.9) (77.9)
Accounts payable and accrued liabilities........................... 367.6 181.2 263.4
Deferred revenue................................................... 162.1 133.7 (148.7)
Income taxes payable............................................... (275.7) (110.5) 32.5
---------------------------------------
Total adjustments............................................... 1,641.5 1,344.2 1,459.5
---------------------------------------
Net cash provided by operating activities...................................... 2,062.4 2,087.6 2,190.1
---------------------------------------

Cash Flows from Investing Activities
Proceeds from sales of marketable securities................................... 278.5 134.1 90.8
Proceeds from investments and other assets..................................... 411.1 271.4 255.4
Proceeds from divestitures..................................................... 66.5 408.4 36.5
Payments for purchases of property and equipment............................... (684.9) (870.3) (769.2)
Payments for investments and other assets...................................... (222.8) (440.6) (308.8)
Payments related to acquisitions, net of cash acquired......................... (1,722.1) (108.1) (180.4)
Payments for purchases of software and other intangibles....................... (113.7) (110.0) (132.3)
Payments for purchases of marketable securities................................ (47.2) (120.8) (326.2)
Other.......................................................................... 160.2 57.1 86.2
---------------------------------------
Net cash used in investing activities.......................................... (1,874.4) (778.8) (1,248.0)
---------------------------------------

Cash Flows from Financing Activities
Proceeds from commercial paper and long-term debt.............................. 30,366.2 7,254.8 8,377.3
Payments on commercial paper and long-term debt................................ (28,955.8) (7,911.7) (9,155.3)
Purchase of treasury stock..................................................... (1,835.7) (93.3) -
Employee stock transactions and related tax benefits........................... 162.3 39.0 76.8
Dividends paid................................................................. (291.4) (295.3) (293.8)
Proceeds from sale of stock of subsidiaries.................................... - 65.1 553.3
Redemption of stock of subsidiaries............................................ - - (688.1)
---------------------------------------
Net cash used in financing activities.......................................... (554.4) (941.4) (1,129.8)
---------------------------------------
Effect of exchange rate changes on cash and cash equivalents........................ (135.2) (6.0) (14.8)
---------------------------------------
Net increase (decrease) in cash and cash equivalents................................ (501.6) 361.4 (202.5)
Cash and cash equivalents at beginning of year...................................... 1,038.8 677.4 879.9
---------------------------------------
Cash and cash equivalents at end of year............................................ $ 537.2 $ 1,038.8 $ 677.4
=======================================

See accompanying notes to consolidated financial statements.

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Electronic Data Systems Corporation is a professional services firm
that offers its clients a portfolio of related services worldwide within the
broad categories of systems and technology services, business process
management, management consulting, and electronic business. Services include the
management of computers, networks, information systems, information processing
facilities, business operations and related personnel. As used herein, the terms
"EDS" and the "Company" refer to Electronic Data Systems Corporation, and its
consolidated subsidiaries.

Principles of Consolidation

The consolidated financial statements include the accounts of EDS and
its controlled subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company's investments in companies in
which it does not control, but has the ability to exercise significant influence
over operating and financial policies, are accounted for under the equity
method.

Earnings Per Share

Basic earnings per share of common stock is computed using the
weighted-average number of EDS common shares outstanding during the period.
Diluted earnings per share reflects the incremental increase in common shares
outstanding assuming the exercise of all employee stock options and restricted
stock units that would have had a dilutive effect on earnings per share. A
reconciliation of the number of shares used in the calculation of basic and
diluted earnings per share is as follows for the years ended December 31, 1999,
1998 and 1997 (in millions):

Years Ended December 31,
------------------------
1999 1998 1997
------------------------

Basic earnings per share of common stock:
Weighted-average common shares outstanding..... 486.2 492.2 489.8
Effect of dilutive securities (Note 10):
Restricted stock units......................... 6.0 2.7 3.7
Stock options.................................. 5.8 0.6 0.4
------------------------
Diluted earnings per share:
Weighted-average common and common equivalent
shares outstanding.......................... 498.0 495.5 493.9
========================

Securities that were outstanding but were not included in the
computation of diluted earnings per share because their effect was antidilutive
include restricted stock units of 0.4 million and 5.4 million shares for the
years ended December 31, 1998 and 1997, respectively, and options to purchase
1.6 million, 9.6 million and 10.1 million shares of common stock for the years
ended December 31, 1999, 1998 and 1997, respectively.

Marketable Securities

Marketable securities at December 31, 1999 and 1998 consist of
government and agency obligations, corporate debt, and corporate equity
securities. The Company classifies all of its debt and marketable equity
securities as available-for-sale, and they are recorded at fair value.
Unrealized holding gains, net of the related tax effect, totaling $261.5
million, $74.8 million and $23.5 million at December 31, 1999, 1998 and 1997,
respectively, are excluded from earnings and are reported as a component of
shareholders' equity until realized. Any decline in the fair value of an
available-for-sale security below its cost that is deemed other than temporary
is charged to earnings, resulting in the establishment of a new cost basis for
the security.

24

Property and Equipment

Property and equipment are carried at cost. Depreciation of property
and equipment is calculated using the straight-line method over the lesser of
the asset's estimated useful life, the life of the related customer contract, or
the term of the lease in the case of leasehold improvements. The ranges of
estimated useful lives are as follows:

Years
-----
Buildings.................................................... 20-40
Facilities................................................... 5-20
Computer equipment........................................... 3-8
Other equipment and furniture................................ 3-15

Software, Goodwill and Other Intangibles

Software purchased by the Company and utilized in designing, installing
and operating business information and communications systems is capitalized and
amortized on a straight-line basis over a two- to five-year period. Costs of
developing and maintaining software systems are incurred primarily in connection
with client contracts and are considered contract costs. Software development
costs for computer software that is sold, leased or otherwise marketed as a
separate product or as part of a product or process that are incurred subsequent
to establishing technological feasibility are capitalized. Effective January 1,
1999, software development costs that are incurred to meet the Company's
internal needs are capitalized. Amounts capitalized as software development
costs are amortized on a straight-line basis over three years.

The cost of acquired companies is allocated first to their identifiable
assets based on estimated fair values. Costs allocated to identifiable
intangible assets are amortized on a straight-line basis over the remaining
estimated useful lives of the assets, as determined by underlying contract terms
or independent appraisals. Such lives range from two to ten years. The excess of
the purchase price over the fair value of identifiable assets acquired, net of
liabilities assumed, is recorded as goodwill and amortized on a straight-line
basis over the useful life. The useful life is determined based on the
individual characteristics of the acquired entity and ranges from five to forty
years.

The Company periodically evaluates the carrying amounts of goodwill, as
well as the related amortization periods, to determine whether adjustments to
these amounts or useful lives are required based on current events and
circumstances. The evaluation is based on the Company's projection of the
undiscounted future operating cash flows of the acquired operation over the
remaining useful lives of the related goodwill. To the extent such projections
indicate that future undiscounted cash flows are not sufficient to recover the
carrying amounts of related goodwill, the underlying assets are written down by
charges to expense so that the carrying amount is equal to future undiscounted
cash flows. The assessment of the recoverability of goodwill will be affected if
estimated future operating cash flows are not achieved.

Revenue Recognition

The Company provides services under level-of-effort and fixed-price
contracts, which generally extend up to ten years. Under level-of-effort
contracts, revenue is recognized as services are provided to the client in
accordance with contractual billing schedules. For certain fixed-price
contracts, revenue is recognized on the percentage-of-completion method, based
on the percentage that incurred contract costs to date bear to total estimated
contract costs after giving effect to the most recent estimates of total cost.
The effect of changes to total estimated contract costs is recognized in the
period such changes are determined. Provisions for estimated losses are made in
the period in which the loss first becomes apparent. Revenue under
non-refundable fixed-price contracts for software licenses is recognized after
the software has been delivered and all significant uncertainties regarding
customer acceptance have expired. The portion of the fixed-fee revenue related
to maintenance is deferred and recognized ratably over the contract period.

25

Deferred revenues of $718.3 million and $593.3 million at December 31,
1999 and 1998, respectively, represent billings in excess of costs and related
profits on certain contracts. Included in accounts receivable are unbilled
receivables of $999.5 million and $821.0 million at December 31, 1999 and 1998,
respectively. Unbilled receivables represent costs and related profits in excess
of billings on certain fixed-price contracts. Unbilled receivables were not
billable at the balance sheet date but are recoverable over the remaining life
of the contract through billings that will be made in accordance with
contractual agreements. Of the unbilled receivables at December 31, 1999,
billings to such clients totaling $143.2 million are expected to be collected in
2001 and thereafter. A specific client's unbilled receivable balance may not be
directly decreased for such future years' billings because additional costs may
also be incurred in the future in accordance with the contractual agreements.

Currency Translation

Assets and liabilities of non-U.S. subsidiaries whose functional
currency is not the U.S. dollar are translated at current exchange rates.
Revenue and expense accounts are translated using an average rate for the
period. Translation gains and losses are not included in determining net income,
but are reflected as a component of shareholders' equity. Cumulative currency
translation adjustment losses included in shareholders' equity were $334.1
million, $171.0 million and $176.3 million at December 31, 1999, 1998 and 1997,
respectively. Non-functional currency transaction gains and losses, net of
income taxes, are included in determining net income and were a gain of $1.0
million, a loss of $8.5 million and a gain of $3.9 million, respectively, for
the years ended December 31, 1999, 1998 and 1997.

Comprehensive Income

Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners. The
related tax effect allocated to each component of other comprehensive income is
as follows (in millions):

December 31, 1999
-------------------------------------------
Before Tax Tax (Expense) Net of Tax
Amount Benefit Amount
-------------------------------------------

Foreign currency translation adjustments................................. $(163.1) $ - $(163.1)
-------------------------------------------
Minimum pension liability adjustment..................................... (11.1) 4.0 (7.1)
-------------------------------------------
Unrealized holding gains on securities:
Unrealized holding gains arising during the period.................... 406.9 (146.5) 260.4
Reclassification adjustment for gains realized in income.............. (115.2) 41.5 (73.7)
-------------------------------------------
Net unrealized gains.................................................. 291.7 (105.0) 186.7
-------------------------------------------
Other comprehensive income............................................... $ 117.5 $(101.0) $ 16.5
===========================================

For the years ended December 31, 1998 and 1997, reclassification
adjustments for gains (losses) realized in income were $15.0 million and $(2.5)
million, respectively, net of the related tax expense (benefit) of $5.4 million
and $(0.9) million, respectively.

Income Taxes

The Company provides for deferred taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed. The deferral method is used to account
for investment tax credits.

Statements of Cash Flows

The Company considers the following items with original maturities of
three months or less, to be cash equivalents: certificates of deposit,
commercial paper, repurchase agreements and money market funds.

26

Financial Instruments

The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 1999 and 1998 (in millions):

December 31,
---------------------------------------------------
1999 1998
---------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------

Current available-for-sale marketable securities (Note 2)..... $ 191.5 $ 191.5 $ 272.9 $ 272.9
Investment in securities, joint ventures and partnerships,
excluding equity method investments (Note 4)............... 476.2 485.2 564.8 584.1
Lo