The Immigration and Naturalization Service has transferred a major portion of a $99.5 million computer contract from IBM to Electronic Data Systems Corp. following a dispute over an allegedly illegal "midnight meeting" between INS and IBM officials.

After the meeting, which took place at INS offices late in the evening of May 10, IBM lowered its "best and final" bid on the computer contract by $3.3 million, allowing it to narrowly beat out EDS, its only competitor. Last summer, citing "serious legal questions concerning the propriety of the meeting," U.S. District Judge Norma Johnson issued a preliminary injunction that blocked the contract until EDS' bid protest with the General Accounting Office was resolved.

INS officials said yesterday that as a result of the legal dispute, they entered into an out-of-court settlement on Jan. 10 that shifts the bulk of the contract from IBM to EDS. They also denied that the late-night meeting was improper, saying it was merely for the purpose of informing IBM that the company had "misunderstood" the Request for Proposal (RFP) and had made a "mistake" in its bid proposal.

"We made a decision that we wanted to settle this thing," said Paul Virtue, INS's assistant general counsel. "Waiting for GAO could take up to six months, and we were having to pay an extra $300,000 to rent computer equipment. . . .We wanted our equipment."

Under the settlement, the Dallas-based EDS, which is now a subsidiary of General Motors Corp., will receive about $91.5 million while IBM's Federal Systems Division will receive $1.5 million, with the remainder going to McLean-based Planning Research Corp., a subcontractor. But Virtue said that, under the settlement, EDS will end up having to spend most of its money to buy the computer hardware from an IBM division.

The contract at issue is part of a major new computer system that INS is installing that will eventually allow the agency to instantaneously monitor the entry and departure of the estimated 52 million foreigners who enter the United States each year, according to INS officials.

IBM and EDS had originally submitted their bids last May. But INS officials said they concluded that, although EDS was the low bidder, IBM had misinterpreted the agency's RFP, bidding to install 12,000 computer terminals rather than the 8,500 the agency needed.

"INS called the meeting to verify the mistake that IBM had made," said Virtue. "The integrity of the bid solicitation was our concern."

The closed-door meeting was attended by two INS officials and five IBM employes. An IBM spokesman said the company would have no comment on the dispute.