EDS (to Xerox): You had me at "hello." EDS and Xerox Corp. say they've patched things up and are expanding their relationship. EDS has dropped a 1999 suit against Xerox, and Xerox has signed a five-year, $1.5 billion IT-outsourcing contract extension with EDS.

The extension builds upon a 10-year, $3.2 billion outsourcing contract signed in 1994 under which EDS hosts Xerox's IT operations and provides application-development and app-management services worldwide. EDS says it has dropped the suit, which was sparked by a previous contract dispute. Charles Ansley, president of EDS U.S. Information Solutions, wouldn't elaborate on the dispute, but he says the contract extension is proof that the animosity is gone.

In fact, Ansley says, a strong working relationship is building between EDS CEO Dick Brown and Xerox CEO Anne Mulcahy. There also are hopes that the two companies will jointly develop new technologies like integrated networking, he says.

This is a strategic thaw for both companies. Xerox wants to further develop its document-management outsource business, and riding on EDS's experienced services-selling coattails would be beneficial, says Bruce Caldwell, a Dataquest analyst. EDS, meanwhile, gains another name-brand partner to flaunt before potential clients. It also can more easily broaden its document-output management product line.

In fact, the contract extension comes a few months after EDS signed Xerox to a five-year, $50 million contract to include Xerox products and services as part of EDS's U.S. Navy Marine Corps intranet contract, signed in 2000 for about $6.9 billion.

EDS is in the process of implementing Xerox Phaser color and black-and-white network printers and Xerox Document Centre digital systems to about 300 military sites worldwide supporting more than 360,000 sailors, Marines, and civilians. The Xerox contract extension is the second-largest deal EDS has won this year. Sabre Inc. signed EDS to a 10-year, $2.2 billion IT outsourcing contract in March.