Ö  Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002

or

     Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended from _____ to _____

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

The Board of Directors and Stockholders
Computer Associates International, Inc.

We have reviewed the consolidated condensed balance sheet of Computer Associates International, Inc. and subsidiaries as of September 30, 2002, and the related consolidated condensed statements of operations for the three month and six month periods ended September 30, 2002 and 2001 and cash flows for the six month periods then ended. These consolidated condensed financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Computer Associates International, Inc. and subsidiaries as of March 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated May 10, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of March 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

New York, New York
October 21, 2002

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COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)

(in millions)

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COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)

(in millions, except per share amounts)

3

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)

(in millions, except per share amounts)

4

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

(in millions)

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NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the three months and six months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in Computer Associates International, Inc.'s (the Registrant or the Company) Annual Report on Form 10-K (Form 10-K) for the fiscal year ended March 31, 2002.

Basis of Revenue Recognition: The Company derives revenue from licensing software products, providing post-contract customer support and professional services. The Company licenses to customers the right to use its enterprise software products pursuant to software license arrangements. The timing and amount of license revenue recognized during an accounting period is determined by the nature of the contractual provisions included in the license arrangement with customers. For a detailed description of the Company's revenue recognition policy, refer to Note 1 of Form 10-K for the fiscal year ended March 31, 2002.

Reclassifications: Certain prior year balances have been reclassified to conform with the current year presentation. For a detailed description of the reclassifications, refer to Note 1 of Form 10-K for the fiscal year ended March 31, 2002.

Net Loss Per Share: Basic loss per share and diluted loss per share are computed by dividing net loss by the weighted-average number of common shares outstanding for the period.

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Statements of Cash Flows: For the six months ended September 30, 2002 and 2001, interest payments were $105 million and $130 million, respectively, and income taxes paid were $87 million and $133 million, respectively.

Cash Dividends: In May 2002, the Company's Board of Directors declared its regular, semi-annual cash dividend of $.04 per share, which totaled approximately $23 million. The dividend was paid on July 8, 2002 to stockholders of record on June 20, 2002.

Comprehensive Loss: Comprehensive loss includes unrealized losses on the Company's available-for-sale securities and foreign currency translation adjustments. The components of comprehensive loss, net of related tax, for the three month and six month periods ended September 30, 2002 and 2001 are as follows:

Accounts Receivable: Net trade and installment accounts receivable consist of the following:

At September 30, 2002 and March 31, 2002, respectively, unearned revenue - current consists of unamortized discounts of $233 million and $288 million, unearned maintenance of $254 million and $290 million, deferred subscription revenue of $690 million and $522 million, and unearned professional services of $40 million and $58 million.

At September 30, 2002 and March 31, 2002, respectively, unearned revenue - noncurrent consists of unamortized discounts of $324 million and $417 million, unearned maintenance of $260 million and $333 million, and deferred subscription revenue of $1.864 billion and $1.919 billion.

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Acquisition-related liabilities: As disclosed in the Company's Form 10-K for the fiscal year ended March 31, 2002, the Company acquired several businesses in fiscal year 2000 and prior. The acquisition related costs and remaining balances are provided below. Since the beginning of fiscal year 2003 and for the full fiscal years 2002 and 2001, the Company did not complete any acquisitions that would have given rise to additional acquisition related liabilities.

The employee costs consist of involuntary termination benefits and the duplicate facilities and other costs relate to operating leases which expire at various times through 2010, negotiated buyouts of operating lease commitments and other contractually related liabilities. The fiscal year 2001 Sterling Software, Inc. (Sterling) and PLATINUM technology International, inc. (PLATINUM) adjustments represent changes in the exit plan from its formulation until its finalization less than one year from the completion of the respective acquisition. The remaining acquisition adjustments, which resulted in a reduction to the corresponding liability and related goodwill, represent reductions due to the settlement of obligations at amounts less than those originally estimated.

Identified Intangible Assets: In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which requires the use of a non-amortization approach to account for goodwill and certain intangible assets. The Company adopted SFAS No. 142 on April 1, 2002. See Note C to these Consolidated Condensed Financial Statements for additional information.

In the table below, capitalized software includes both purchased and internally developed software costs and other identified intangible assets includes both customer relationships and trademarks/trade name costs. Internally developed capitalized software costs are included in the "Other noncurrent assets" line item on the accompanying Consolidated Condensed Balance Sheets. Other identified intangible asset costs are included in the "Goodwill and other intangible assets" line item on the accompanying Consolidated Condensed Balance Sheets. The gross carrying amounts and accumulated amortization for identified intangible assets subject to amortization are as follows:

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For the second quarter of fiscal year 2003 and 2002, amortization of capitalized software costs was $118 million and $123 million, respectively. Amortization of other identified intangible assets was $9 million and $13 million in the second quarter of fiscal year 2003 and 2002, respectively. Amortization for other identified intangible assets for the second quarter of fiscal year 2002, which was prior to the adoption of SFAS No. 142, is inclusive of assembled workforce amortization of $3 million.

For the first six months of fiscal year 2003 and 2002, amortization of capitalized software costs was $237 million and $244 million, respectively. Amortization of other identified intangible assets was $19 million and $26 million for the first six months of fiscal year 2003 and 2002, respectively. Amortization for other identified intangible assets for the first six months of fiscal year 2002, which was prior to the adoption of SFAS No. 142, is inclusive of assembled workforce amortization of $6 million.

Upon adoption of SFAS No. 142 in April 2002, assembled workforce no longer meets the definition of an identifiable intangible asset. As a result, the net balance, as of March 31, 2002, of $79 million was reclassified to goodwill. The carrying amount of goodwill as of September 30, 2002, inclusive of assembled workforce, was $4.566 billion, which includes an approximate $4 million effect from foreign currency exchange rate fluctuations during the six month period ended September 30, 2002. All intangible assets were amortized during the fiscal year ended March 31, 2002, which was prior to the adoption of SFAS No. 142.

Based on identified intangible assets recorded through September 30, 2002, the annual amortization expense is expected to be as follows:

NOTE B - DIVESTITURE

In April 2002, the Company completed the divestiture to SSA Global Technologies, Inc. (SSA) of certain assets of the Company, principally the supply-chain management, financial management and human resource management product lines under the name interBiz. Proceeds from the divestiture totaled $25 million, approximately $12 million of which was received in the quarter ended June 30, 2002 and the remainder is due one year from the date of the divestiture, subject to certain contingencies. These interBiz operations generated approximately $43 million of revenue and $47 million of direct expenses for the first six months of fiscal year 2002. As part of the transaction, net billed and unbilled accounts receivable and net deferred subscription revenue were reduced by approximately $25 million and $72 million, respectively. Approximately 725 employees were transferred to SSA as part of this transaction. Under the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company recorded a $59 million non-cash impairment charge to operations related to its investment in interBiz assets in March 2002. This non-cash impairment charge was included in the "Selling, general and administrative" expense line item (SG&A) in the Company's Form 10-K for the year ended March 31, 2002.

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NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 142 effective April 1, 2002, which had the effect of prospectively eliminating the Company's amortization of goodwill beginning with the first quarter of fiscal year 2003. Under the non-amortization approach, goodwill and certain other intangibles will not be amortized into results of operations, but instead will be reviewed for impairment, written down and charged to results of operations only in periods in which the recorded value of goodwill and certain other intangibles is more than its implied fair value. The Company obtained an independent valuation as of April 2002 which did not identify any evidence of a potential impairment; however, future impairment reviews may result in write-downs. The Company did not acquire any goodwill during the first and second quarters of fiscal year 2003 nor did it record a gain or loss on disposal of all or a portion of a reporting unit during the first and second quarters of fiscal year 2003. A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill and assembled workforce amortization, net of related income tax effect, is as follows:

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This statement, which is effective for the Company April 1, 2003, is not expected to have a material impact on the Company.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Under SFAS No. 144, assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recorded. The Company adopted SFAS No. 144 effective April 1, 2002. There was no impact on the Company as a result of adopting SFAS No. 144.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company adopted SFAS No. 145 effective July 1, 2002. As a result, the Company recorded a gain of $2 million in the second quarter of fiscal year 2002 from the early retirement of a portion of the Company's debt in the "Interest expense, net" line item on the accompanying Consolidated Condensed Statements of Operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also established that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002.

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Note 1 of the consolidated financial statements included in the Company's Form 10-K for the fiscal year ended March 31, 2002 contains a summary of the significant accounting policies that are used by the Company. Many of these accounting policies require the use of estimates. Critical accounting estimates, which are important to the portrayal of the Company's financial condition and require complex, subjective judgments, are as follows:

In October 2000, the Company announced a shift to its new Business Model (new Business Model), offering customers the flexibility and freedom to adapt to rapidly changing enterprise requirements while reducing the risks and costs associated with traditional software licensing models. Under the new Business Model, customers can manage the length and dollar value of their software licenses. The new Business Model provides customers with the flexibility to subscribe to software under month-to-month licenses or choose cost certainty by committing to longer-term arrangements. The new Business Model also permits customers to vary their software mix as their business and technology needs change, including the right to receive unspecified future software within designated product lines for no additional fee. The Company believes the new Business Model improves the visibility and predictability of the Company's revenue streams by recognizing license revenue on a ratable basis over the arrangeme nt term rather than on an up-front, one-time basis as the Company did prior to the quarter ended December 31, 2000.

The terms of these new Business Model arrangements are structured such that product revenue is generally recognized ratably over the term of the license on a monthly basis. The portion of the license arrangement that is not recognized currently as revenue creates deferred subscription revenue which will be recognized as revenue over the remaining term of the arrangement.

Prior to the introduction of the new Business Model, maintenance revenue was bundled for a portion of the term of the license arrangement. Under these arrangements, the maintenance, which was based on optional annual renewal rates stated in the arrangement, initially was deferred and subsequently amortized into revenue over the initial contractual term of the arrangement. Maintenance renewals have been recognized ratably over the term of the renewal arrangement. For arrangements executed under the new Business Model, maintenance is bundled for the entire term of the license arrangement and, along with the license fee, is recognized ratably as subscription revenue over the entire term of the license arrangement commencing upon delivery of the currently available software products.

Financing fees result from the initial discounting to present value of product sales with extended payment terms under the Company's business model in place prior to October 2000 (old Business Model) and the subsequent increase of receivables to represent the amount due and payable by customers. Financing fees will continue to decrease as they are amortized over the arrangement term since the Company no longer records the present value of product sales as earned revenue at contract signing under the new Business Model.

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As detailed in the table included in Note A to the Consolidated Condensed Financial Statements at September 30, 2002, net trade and installment accounts receivable, after accounting for unearned revenue and the allowance for doubtful accounts, was $2.856 billion.

The Company maintains an allowance for doubtful accounts relating to the portion of the accounts receivable that has been recognized as revenue, which the Company does not expect to collect in full. The Company performs a quarterly analysis to determine the appropriate allowance for doubtful accounts. This analysis includes various analytical procedures and a review of factors, including specific individual balances selected from a cross-section of the accounts that comprise total accounts receivable, the Company's history of collections of long-term contracts, as well as the overall economic environment. The Company's ability to collect its accounts receivable is dependent upon a number of factors including the performance of its products, customer satisfaction, financial condition of customers and general economic conditions. Changes to these factors will influence the amount of the required allowance.

The Company expects the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the old Business Model are billed and collected.

The Company has recognized for financial statement purposes a portion of the tax benefits connected with losses related to operations. At September 30, 2002, the current and noncurrent deferred tax assets, net of a valuation allowance, totaled $73 million and $38 million, respectively, and have been offset against the respective deferred tax liabilities. This recognition assumes that the Company will be able to generate sufficient future taxable income so that the carryforward of these losses will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Deferred tax assets are primarily a result of acquisition liabilities, such as duplicate facility, employee severance and other costs, foreign net operating losses (NOLs) and the recognition of deferred subscription revenue pursuant to the current Business Model. The NOLs generally expire between 2003 and 2013. A valuation allowance was established in fiscal year 2002 for certain foreign deferred tax assets the Company believes may not be realized. Adjustments to the valuation allowance may be made in the future if it is determined that the amount of NOLs realized is greater or less than the amount recorded.

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired by the Company in purchase business combinations and is not readily exchangeable for cash. The Company has historically amortized goodwill using the straight-line method based on an estimated useful life of 10 to 20 years. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. The Company adopted SFAS No. 142 effective April 1, 2002. Upon adoption, the Company discontinued the amortization of goodwill with a net carrying value, exclusive of assembled workforce, of approximately $4.483 billion at March 31, 2002. The Company obtained an independent valuation as of April 2002 which did not identify any evidence of a potential goodwill impairment ; however, future impairment reviews, which includes a review of the Company's market capitalization, may result in write-downs. The valuation was based upon the Company's forecast of operating results for the entity that has recorded goodwill, as well as estimates of fair value of the entity and its tangible and intangible assets.

The carrying value of capitalized software products (purchased software and internally developed software) and other intangible assets are reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment, which includes an assessment of the net realizable value for capitalized software products and the future recoverability of cost for other intangible assets as of the balance sheet date.

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Total revenue for the quarter ended September 30, 2002 increased $39 million, or 5%, to $772 million from the prior year comparable quarter. The increase was primarily due to the Company's transition to the new Business Model during the third quarter of fiscal year 2001. This resulted in an increase in subscription revenue from the prior year comparable period, partially offset by a decrease in maintenance, financing fees and professional services revenue. The revenue increase was also offset by the sale of the Company's interBiz unit in April 2002, which had contributed approximately $23 million of revenue in the prior fiscal year comparable quarter. Apprehension towards capital spending by many of the Company's existing and potential customers due to weak conditions in the overall economy and the IT industry also adversely impacted revenue in the second fiscal quarter of 2003. The Company does not expect an improvement in capital spending by customers until there is an improvement in general economic and industry conditions.

Subscription revenue increased $156 million, or 83%, to $343 million from the comparable prior year quarter. Subscription revenue represents the ratable revenue recognized over the contract term on contracts executed under the new Business Model. The increase is primarily due to the introduction of the new Business Model in the third quarter of fiscal year 2001; the three month period ended September 30, 2002 included subscription revenue earned from contracts executed during an additional 12 month period. For the quarters ended September 30, 2002 and 2001, the Company added new deferred subscription revenue of $394 million and $466 million, respectively, while the approximate duration of contracts executed under the new Business Model in the quarters ended September 30, 2002 and 2001 averaged 2.80 years and 3.75 years, respectively. Thus, annualized deferred subscription revenue, which represents the unrecognized contract value from arrangements executed during a period divided by the wei ghted average contract term of all such arrangements during the same period, increased approximately $17 million, or 14%, for the quarter ended September 30, 2002 over the comparable prior year quarter.

Software fees and other consists of royalties and revenue from arrangements with distribution partners and original equipment manufacturer (OEM) partners and decreased $11 million, or 10%, to $95 million from the comparable prior year quarter. The decrease was attributable to a reduction in revenue from arrangements with distribution and OEM partners primarily due to a difficult economic and competitive environment, which adversely impacted sales. Quantification of the impact of each of these factors on the decrease in software fees and other is not readily determinable.

Maintenance revenue for the quarter ended September 30, 2002 was $197 million, a decrease of $51 million, or 21%, from the quarter ended September 30, 2001. The decrease of maintenance revenue as a separate line item was attributable to the fact that with the new Business Model, maintenance revenue is bundled with license revenue and is included in the "Subscription revenue" line item on the accompanying Consolidated Condensed Statements of Operations. The combined maintenance and license revenue is recognized ratably over the term of the arrangement. Maintenance revenue as a separate line item on the accompanying Consolidated Condensed Statements of Operations will continue to decrease as deferred maintenance revenue under the Company's old Business Model is amortized over the contract term, partially offset by new revenue earned from customers who elect to continue to receive optional maintenance at the expiration of the original contract term of their arrangements.

Financing fees result from the initial discounting to present value of product sales with extended payment terms under the Company's old Business Model and the subsequent increase of receivables to represent the amount due and payable by customers. This accretion of financing revenue on the receivables due in future years is recorded as financing fees. Financing fees decreased $41 million, or 35%, to $77 million compared to the quarter ended September 30, 2001, due to the discontinuance of contracts offered under the old Business Model. Financing fees will continue to decrease as they are amortized over the arrangement term since the Company no longer records the present value of product sales as earned revenue at contract signing under the new Business Model.

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Professional services decreased $14 million, or 19%, to $60 million from the prior year comparable quarter as a result of the weak spending environment that affected the IT service sector in general, as well as the Company's continued shift in focus to professional services engagements that are centered around the Company's products. Quantification of the impact of each of these factors on the decrease in professional services revenue is not readily determinable.

North American and international revenue for the second fiscal quarter increased 1% and 14% over the prior year second fiscal quarter, respectively. The three month period ended September 30, 2001 was inclusive of the interBiz operations, which had contributed approximately $13 million and $10 million of revenue in that period from the North American and international regions, respectively. The increase in international revenue was primarily attributable to an improvement in contract bookings in Europe and Asia. North American revenue represented 65% and 67% of total revenue for the September 2002 and September 2001 quarters, respectively.

Price changes did not have a material impact in this quarter or on the second quarter of the prior fiscal year.

Total revenue for the six months ended September 30, 2002 increased $92 million, or 6%, to $1.537 billion from the prior year comparable period. Consistent with and for the same reasons as the increase in total revenue for the second quarter of fiscal year 2003 as compared with fiscal year 2002, the increase was primarily due to the Company's transition to the new Business Model. The revenue increase was also offset by the sale of certain assets of the Company's interBiz unit in April 2002, which had contributed approximately $43 million of revenue in the prior fiscal year comparable period.

Subscription revenue increased $330 million, or 101%, to $657 million from the comparable prior year period. The increase was primarily due to the introduction of the new Business Model whereby the six month period ended September 30, 2002 included subscription revenue earned from contracts executed during an additional 12 month period.

Software fees and other decreased $19 million, or 9%, to $190 million from the comparable prior year period. The decrease was attributable to a reduction in revenue from arrangements with distribution and OEM partners due primarily to a difficult economic and competitive environment, which adversely impacted sales. Quantification of the impact of each of these factors on the decrease in software fees and other is not readily determinable.

Maintenance revenue for the six months ended September 30, 2002 was $402 million, a decrease of $104 million, or 21%, from the six month period ended September 30, 2001. The decrease of maintenance revenue as a separate line item on the accompanying Consolidated Condensed Statements of Operations was attributable to the fact that with the new Business Model maintenance revenue is bundled with license revenue and is included in the "Subscription revenue" line item on the accompanying Consolidated Condensed Statements of Operations.

Financing fees decreased $83 million, or 34%, to $163 million from the comparable prior year period due to the discontinuance of contracts offered under the old Business Model.

Professional services decreased $32 million, or 20%, to $125 million from the prior year comparable period as a result of the weak spending environment that affected the IT service sector in general, as well as the Company's continued shift in focus to professional services engagements that are centered around the Company's products. Quantification of the impact of each of these factors on the decrease in professional services revenue is not readily determinable.

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North American and international revenue for the first half of fiscal year 2003 increased 3% and 13% over the prior year comparable fiscal period, respectively. The six month period ended September 30, 2001 was inclusive of the interBiz operations, which had contributed approximately $27 million and $16 million of revenue in that period from the North American and international regions, respectively. The increase in international revenue was primarily attributable to an improvement in contract bookings in Europe and Asia. North American revenue represented 64% and 67% of total revenue for the fiscal year to date periods ended September 2002 and September 2001, respectively.

Price changes did not have a material impact on fiscal year 2003 or on the comparable period on fiscal year 2002.

Amortization of capitalized software costs consists of the amortization of both purchased software and capitalized internally-generated software development costs associated with new products and significant enhancements to existing software products that have reached the technological feasibility stage. Amortization of capitalized software costs decreased $5 million, or 4%, to $118 million in the current fiscal year second quarter over the comparable prior year quarter and was due to certain purchased software assets becoming fully amortized.

Cost of professional services consists primarily of personnel related costs to provide professional services and training to customers. Cost of professional services decreased $14 million, or 19%, to $59 million due primarily to a reduction in professional services and related personnel costs from the comparable prior year quarter.

SG&A expenses for the second quarter of fiscal year 2003 decreased $100 million, or 21%, to $373 million compared to the prior year quarter. The decrease was largely attributable to the Company's emphasis on overall cost control measures, including a reduction in personnel and personnel related costs of approximately $60 million related to a decrease in headcount. The Company had approximately 15,900 employees for the quarter ended September 30, 2002, which was approximately 2,200 less than the Company had in the prior year comparable quarter. The decrease was the result of a reduction in workforce of approximately 900 employees in October 2001, a reduction of approximately 725 employees from the divestiture of certain assets of interBiz in April 2002 and the balance of the reduction was primarily due to attrition. The Company's interBiz unit contributed approximately $21 million of SG&A expenses in the prior year comparable quarter, the majority of which related to personnel costs . The decrease in SG&A expenses was also attributable to a reduction of the provision for doubtful accounts as a result of a decrease in net installment accounts receivable related to the old Business Model.

In the second quarter of fiscal year 2003, the Company entered into an agreement with Ranger Governance Ltd. (Ranger) and a founder of Ranger, Mr. Sam Wyly. The agreement included a standstill provision whereby Ranger and Mr. Wyly agreed not to engage in a proxy contest or other similar activity for five years. The Company paid $10 million to extend Mr. Wyly's existing non-compete agreement and to reach the standstill agreement. This amount has been recorded in the "Selling, general and administrative" line item on the accompanying Consolidated Condensed Statements of Operations.

Product development and enhancement expenditures decreased $6 million, or 4%, to $165 million for the second fiscal quarter of 2003 as compared to the prior year second fiscal quarter. However, as a percentage of operating expenses, net research and development expenditures increased to approximately 20% in the current year quarter from approximately 18% in the prior year comparable quarter, excluding the amortization of goodwill

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and assembled workforce. This resulted from the Company's continued focus on product development and enhancements, with an emphasis on adapting and enhancing products for distributed processing and IBM's z/OS environments, emerging technologies such as wireless and web services, as well as a broadening of the Company's enterprise product offerings. It is anticipated that product development and enhancement expenditures will continue to constitute a significant portion of total operating expenses since such spending is essential to maintaining the Company's competitive position.

The marginal increase in commissions and royalties for the second quarter of this fiscal year as compared with the prior year quarter was the result of higher current quarter sales activity on an annualized basis, partially offset by the sale of certain assets of the Company's interBiz unit, which contributed approximately $2 million of such expenses in the prior year comparable quarter.

Depreciation and amortization of goodwill and other intangible assets in the second quarter of fiscal year 2003 decreased $115 million, or 77%, to $35 million over the second quarter of the prior fiscal year. The decrease was a result of the Company's adoption of SFAS No. 142, whereby a non-amortization approach is used to account for goodwill and certain intangible assets. Under the non-amortization approach, goodwill and certain intangible assets are not amortized into results of operations, but instead are reviewed for impairment, written down and charged to results of operations only in periods in which the recorded values of goodwill and certain intangibles are more than their implied fair value. The Company obtained an independent valuation as of April 2002 which did not identify any evidence of a potential impairment; however, future impairment reviews may result in write-downs. In accordance with GAAP in place at that time, the Company amortized $111 million and $3 million of goodw ill and assembled workforce, respectively, for the quarter ended September 30, 2001.

Net interest expense decreased $16 million, or 28%, to $41 million for the second quarter of fiscal year 2003 compared to the prior fiscal year second quarter. Of the total decrease, $3 million was a result of the decrease in the average variable interest rate, $11 million was due to the decrease in average debt outstanding and $2 million was a result of a gain from the early retirement of a portion of the Company's outstanding debt.

Amortization of capitalized software costs decreased $7 million, or 3%, to $237 million due to certain purchased software assets becoming fully amortized.

Cost of professional services decreased $35 million, or 23%, to $118 million due primarily to a reduction in professional services and related personnel costs from the comparable prior year period.

SG&A expenses for the first half of fiscal year 2003 decreased $217 million, or 22%, to $754 million compared to the comparable prior year period. Consistent with and for the same reasons as the decrease in SG&A expense for the second quarter in the current fiscal year as compared with the second quarter in the prior fiscal year, the decrease was largely attributable to the Company's emphasis on overall cost control measures, including a reduction in personnel and personnel related costs of approximately $125 million related to a decrease in headcount. Certain assets of the Company's interBiz unit, which were divested in April 2002, contributed approximately $42 million of SG&A expenses in the first half of fiscal year 2002, the majority of which related to personnel costs. The decrease in SG&A expenses was also attributable to a reduction of the provision for doubtful accounts as a result of a decrease in net installment accounts receivable related to the old Business Mode l.

Product development and enhancement expenditures decreased $14 million, or 4%, to $330 million for the first half of fiscal year 2003 as compared to the prior fiscal year comparable period. However, as a percentage of operating expenses, net research and development expenditures increased to approximately 20% in the current year six month period from approximately 18% in prior year comparable period, excluding the amortization of goodwill and assembled workforce. This resulted from the Company's continued focus on product development and enhancements, with an emphasis on adapting and enhancing products for distributed processing and IBM's z/OS environments, emerging technologies such as wireless and web services, as well as a broadening of the Company's enterprise product offerings.

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Commissions and royalties decreased $5 million, or 4%, to $120 million for the first half of this fiscal year as compared with the prior year comparable period. The decrease was primarily the result of the sale of certain assets of the Company's interBiz unit, which contributed approximately $5 million of such expenses in the prior year comparable period.

Depreciation and amortization of goodwill and other intangible assets in the first half of fiscal year 2003 decreased $236 million, or 77%, to $69 million over the comparable fiscal year period. The decrease is consistent with and was for the same reasons as the decrease in depreciation and amortization of goodwill and other intangible assets for the second quarter of fiscal year 2003 as compared with the second quarter of fiscal year 2002. The Company amortized $225 million and $6 million of goodwill and assembled workforce, respectively, for the first half of fiscal year 2002.

Net interest expense decreased $38 million, or 30%, to $88 million for the first half of fiscal year 2003 as compared to the prior fiscal year comparable period. Of the total decrease, $13 million was a result of the decrease in the average variable interest rate, $22 million was due to the decrease in average debt outstanding and $3 million was a result of a gain from the early retirement of a portion of the Company's outstanding debt.

For the second quarter of fiscal year 2003, the pretax loss was $79 million as compared with the pretax loss of $373 million in the prior year comparable quarter. On a year to date basis, the pretax loss was $179 million as compared with the pretax loss of $823 million in the comparable prior fiscal year period. The decrease in pretax loss in both the quarter and fiscal year to date periods ended September 30, 2002 was primarily related to an increase in revenue, as well as to a overall reduction in expenses of $141 million, or 14%, for the September 2002 quarter compared to the September 2001 quarter, excluding the amortization of goodwill and assembled workforce, and an overall reduction in expenses of $321 million, or 16%, for the fiscal year to date period ending September 30, 2002 when compared to the fiscal year to date period ended September 30, 2001, also excluding the amortization of goodwill and assembled workforce. The Company's consolidated effective tax rate (benefit) was 35% and 22% for the quarters ended September 30, 2002 and 2001, respectively, and 35% and 23% for the six month periods ended September 30, 2002 and 2001, respectively. The increased effective tax rate reflects the impact of the Company's adoption of SFAS No. 142, which eliminated goodwill amortization that is non-deductible for income tax purposes.

Cash, cash equivalents and marketable securities totaled $776 million at September 30, 2002, a decrease of $35 million from the June 30, 2002 balance of $811 million. Cash generated from operations and cash on hand as of June 30, 2002 was used to repay approximately $132 million in outstanding debt and to fund stock repurchases of approximately $47 million. Cash generated from operations for the quarters ended September 30, 2002 and 2001 was $202 million and $164 million, respectively. Approximately $20 million of cash expected to be received in the third quarter of fiscal year 2003 was received in the final days of the second quarter of fiscal year 2003.

For the six months ended September 30, 2002, cash, cash equivalents and marketable securities decreased approximately $404 million. Cash generated from operations and cash on hand as of March 31, 2002 was used to repay approximately $694 million in outstanding debt and to fund stock repurchases of approximately $63 million. Cash generated from operations for the six month period ended September 30, 2002 and 2001 was $399 million and $318 million, respectively.

The Company's bank credit facilities consist of a $1 billion four-year revolving credit facility and a $2 billion four-year term loan, which expire in the first quarter of fiscal year 2004. As of September 30, 2002, $429 million remained outstanding under the four-year term loan and $350 million was drawn under the four-year revolver. The interest rates on such debt are determined based on a ratings grid, which applies a margin to the prevailing London InterBank Offered Rate (LIBOR).

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The Company has a $1 billion commercial paper (CP) program. The four-year revolver supports the CP program as a backstop facility. As of September 30, 2002, there were no outstanding amounts due under the CP program. The Company may consider issuing CP at a future date.

The Company also utilizes other financial markets in order to maintain its broad sources of liquidity. In fiscal year 1997, $320 million of unsecured 6.77% Senior Notes were issued in a private transaction pursuant to an exemption from registration under the Securities Act of 1933. The 6.77% Senior Notes call for annual repayment of $64 million each April, commencing in April 1999 with final payment in April 2003. As of September 30, 2002, $64 million was outstanding under the 6.77% Senior Notes.

In fiscal year 1999, $1.750 billion of unsecured Senior Notes were issued in a transaction pursuant to Rule 144A of the Securities Act of 1933 (Rule 144A). Amounts borrowed, rates and maturities for each issue were $575 million at 6.25% due April 15, 2003, $825 million at 6.375% due April 15, 2005 and $350 million at 6.5% due April 15, 2008. During the second quarter of fiscal year 2003, the Company repurchased in the open market $111 million of the 6.25% Senior Notes due April 15, 2003 at a discount, resulting in a gain of approximately $2 million that was included in the "Interest expense, net" line item on the accompanying Consolidated Condensed Statements of Operations. As of September 30, 2002, $449 million, $825 million and $350 million remained outstanding under the Company's 6.25%, 6.375% and 6.5% Senior Notes, respectively.

In fiscal year 2002, $660 million of unsecured 5% Convertible Senior Notes, due March 15, 2007, were issued in a transaction pursuant to Rule 144A. The Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness. Concurrently with the issuance of the Notes, the Company entered into a call spread repurchase option transaction (Call Spread). Under the terms of the Call Spread, the Company has the option to purchase outstanding shares equivalent to the number of shares that may be issued if all Notes are converted into shares (27.116 million shares), thereby mitigating dilution to stockholders. The Call Spread can be exercised at the three year anniversary of the issuance of the notes at an exercise price of $24.83 per share. To limit the cost of the Call Spread, an upper limit of $36.60 per share has been set such that if the price of the common stock is above that limit at the time of exercise, the number of shares eligible to be purchased will b e proportionately reduced based on the amount the common share price exceeds $36.60 at the time of exercise.

Unsecured and uncommitted multi-currency lines of credit are available to meet any short-term working capital needs for subsidiaries operating outside the United States. These lines total $31 million, of which $15 million was drawn as of September 30, 2002.

Debt ratings for the Company's senior unsecured notes and its bank credit facilities are BBB+ and Baa2 from Standard & Poor's and Moody's Investors Service, respectively. The Company's CP program is rated A-2 from Standard & Poor's and P-2 from Moody's. Peak borrowings under all debt facilities during the quarter ended September 30, 2002 totaled approximately $3.280 billion with a weighted-average interest rate of 5.44%.

As of September 30, 2002, the cumulative number of shares purchased under the Company's various open market common stock repurchase programs since fiscal year 1991 was 175 million, including approximately 4 million shares purchased in the second quarter of fiscal year 2003. The remaining number of shares authorized for repurchase is approximately 25 million.

Capital resource requirements as of September 30, 2002 consisted of lease obligations for office space, computer equipment, mortgage or loan obligations and amounts due as a result of product and company acquisitions. The Company has commitments to invest $9 million in connection with joint venture agreements.

It is expected that existing cash, cash equivalents, marketable securities, the availability of borrowings under existing and renewable credit lines and expected cash provided from operations will be sufficient to meet ongoing cash requirements. The Company expects to renew its bank credit lines prior to their expiration during the quarter ending June 30, 2003. The Company expects its long-standing history of providing extended payment terms to customers to continue.

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As previously announced on July 29, 2002, beginning in fiscal year 2004, the Company will adopt the fair value based method of recording stock options outlined in SFAS No. 123, "Accounting for Stock-Based Compensation." Under the fair value based method, the Company will expense the cost of all newly granted stock options over the vesting period based on the options' fair value at the date of grant.

Current and potential stockholders should consider carefully the risk factors described below. Any of these factors, or others, many of which are beyond the Company's control, could negatively affect the Company's revenue, profitability or cash flow in the future.

Quarterly and annual results of operations are affected by a number of factors, including those listed below, which in turn could adversely affect the Company's revenue, profitability or cash flow in the future.

Any of the foregoing factors, among others, may cause the Company's operating expenses to be disproportionately high or cause its revenue and operating results to fluctuate. As a consequence, the Company's business, financial condition and operating results could be adversely affected.

The market in which the Company competes is marked by rapid and substantial technological change, the steady emergence of new companies and products, evolving industry standards and changing customer needs. To remain competitive, the Company must develop new products and continue to enhance existing products. The Company may be unsuccessful in its ability to develop new releases or new products that meet the needs of its customers in light of competitive alternatives available in the market. In addition, the introduction of new products or versions of existing products may not meet with customer acceptance or may be delayed. The Company's inability to bring new products and enhancements to existing products to the market in a timely manner or the failure for these products to achieve market acceptance could have a material adverse effect on its business, financial condition and operating results.

Many companies with whom the Company competes, including IBM, Sun, HP and other large computer manufacturers, have substantial resources, a larger installed base of customers in any particular market niche, as well as the ability to develop and market software programs similar to and competitive with the products offered by the Company. Competitive products are also offered by numerous independent software companies that specialize in specific aspects of the highly fragmented software industry. Some, like Microsoft, Oracle and SAP, are the leading developers and vendors in their specialized markets. In addition, new companies enter the market on a frequent and regular basis, offering products that compete with those offered by the Company. Increased competition also results from consolidation of existing companies within the industry. Additionally, many customers historically have developed their own solutions that compete with those offered by the Company. Competition from any of thes e sources can result in price reductions, or displacement of the Company's products, which could have a material adverse effect on the Company's business, financial condition and operating results.

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IBM, HP, Sun and Microsoft are the largest suppliers of systems software and, in most cases, are the manufacturers of the computer hardware systems used by most of the Company's customers. Historically, these operating system developers have modified or introduced new operating systems, systems software and computer hardware. Such new products could in the future incorporate features which perform functions currently performed by the Company's products or could require substantial modification of the Company's products to maintain compatibility with these companies' hardware or software. Although the Company has to date been able to adapt its products and its business to changes introduced by hardware manufacturers and system software developers, there can be no assurance that it will be able to do so in the future. Failure to adapt the Company's products in a timely manner to such changes or customer decisions to forego the use of the Company's products in favor of those with comparab le functionality contained either in the hardware or operating system could have a material adverse effect on its business, financial condition and operating results.

Future success of the Company is dependent upon its proprietary technology. The Company protects its proprietary information through the use of patent, copyright, trademark, trade secret laws, confidentiality procedures and contractual provisions. Notwithstanding the Company's efforts to protect its proprietary rights, policing unauthorized use or copying of its proprietary information is difficult. Unauthorized use or copying occurs from time to time and litigation to enforce intellectual property rights could result in significant costs and diversion of resources. Moreover, the laws of some foreign jurisdictions do not afford the same degree of protection to the Company's proprietary rights as do the laws of the United States. For example, "shrink-wrap" or "click-on" licenses may be unenforceable in whole or in part in some jurisdictions in which the Company operates. In addition, patents the Company has obtained may be circumvented, challenged, invalidated or designed around by othe r companies. The Company's inability to adequately protect its intellectual property for these or other reasons could adversely affect its business, financial condition and operating results.

In the past, licensees using proprietary operating systems were furnished with "source code," which makes the operating system generally understandable to programmers, and "object code," which directly controls the hardware and other technical documentation. Since the availability of source code facilitated the development of systems and applications software, which must interface with the operating systems, independent software vendors such as the Company were able to develop and market compatible software. IBM and other hardware vendors have a policy of restricting the use or availability of the source code for some of their operating systems. To date, this policy has not had a material effect on the Company. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may, in the future, result in higher research and development costs for the Company in connection with the enhancement and mo dification of the Company's existing products and the development of new products. Although the Company does not expect that such restrictions will have this adverse effect, there can be no assurances that such restrictions or other restrictions will not have a material adverse effect on the Company's business, financial condition and operating results.

The Company anticipates ongoing use of microcode or firmware provided by hardware manufacturers. Microcode and firmware are essentially software programs in hardware form and are therefore less flexible than other types of software. The Company believes that such continued use will not have a significant impact on the Company's operations and that its products will remain compatible with any changes to such code. However, there can be no assurance that future technological developments involving such microcode will not have an adverse impact on the Company's business, financial condition and operating results.

The Company's products are designed to improve the productivity and efficiency of its customers' information processing resources. In a recessionary environment, the Company's products are often a reasonable economic alternative for customers faced with the prospect of incurring expenditures to increase their existing information processing resources. However, a general slowdown in the world economy or a particular region could cause customers to delay or forego decisions to license new products or upgrades to their existing environments and this could adversely affect the Company's business, financial condition and operating results.

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The Company has identified six product focus areas: Enterprise Management, Security, Storage, Portal and Business Intelligence, Application Life Cycle Management and Data Management and Application Development. Some or all of these areas may not grow, may decline in growth or customers may decline or forego use of products in some or all of these focal areas. This is particularly true in newly emerging areas, such as Portal and Business Intelligence. A decline in these focus areas could result in decreased demand for the Company's products, which would adversely impact its business, financial condition and operating results.

Some of the Company's products contain software licensed from third parties. Some of these licenses may not be available to the Company in the future on terms that are acceptable or allow its products to remain competitive. The loss of these licenses or the ability to maintain any of them on commercially acceptable terms could delay development of future products or enhancement of existing products. This could adversely affect the Company's business, financial condition and operating results.

At the beginning of fiscal years 2002 and 2003, the Company updated its compensation plan for the sales organization. The new compensation plan is in alignment with the new Business Model objectives of providing customer flexibility and satisfaction. The compensation plan may encourage behavior not anticipated or intended as it is implemented, which could adversely affect the Company's business, financial condition and operating results.

The Company's new Business Model affords customers greater flexibility in licensing transactions. For example, under the new Business Model, the Company licenses software on a month-to-month or other short-term basis in order to allow customers the opportunity to try the Company's software solutions without committing to a multi-year license obligation. Transactions such as these increase the risk that customers will not fully implement the Company's software and will not enter into a long-term relationship with the Company. This could adversely affect the Company's business, financial condition and operating results. This effect could be diminished if customers elect cost certainty by committing to longer contract periods.

The Company has historically been dependent upon large dollar enterprise transactions with individual customers. As a result of the flexibility afforded by the new Business Model, the Company anticipates that there will be fewer of these transactions in the future. There can be no assurances, however, that the Company will not be reliant on large dollar enterprise transactions in the future and the failure to close such transactions could adversely affect the Company's business, financial conditions and operating results.

From time to time the Company receives notices from third parties claiming infringement of various forms of their intellectual property. Investigation of these claims, whether with or without merit, can be expensive and could affect development, marketing or shipment of the Company's products. As the number of software patents issued increases, it is likely that additional claims, with or without merit, will be asserted. Defending against such claims is time-consuming and could result in significant litigation expense or settlement with unfavorable terms that could adversely affect the Company's business, financial condition and operating results.

International revenue has historically represented approximately one-third of the Company's total worldwide revenue. Continued success in selling the Company's products outside of the United States will depend on a variety of factors, including the following:

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Increase in tariffs, the imposition of trade restrictions or other factors could adversely affect the Company's business, financial condition and operating results.

Most of the revenue and expenses of the Company's foreign subsidiaries are denominated in local currencies. Due to the substantial volatility of currency exchange rates, it is not possible to predict the effect of exchange rate fluctuations on the Company's future operating results. Given the relatively long sales cycle that is typical for many of the Company's products, foreign currency fluctuations could result in substantial changes in the foreign currency impact on these transactions. Additionally, deterioration of the exchange rate of foreign currencies against the U.S. dollar can affect the Company's ability to increase its revenue within those markets, all of which may adversely impact the Company's business, financial condition and operating results.

The Company's growth strategy is based upon internal development of technology, selective acquisitions and integration of such acquisitions into ongoing operations. Implementation of this growth strategy may result in strains on the Company's management team, internal systems and financial resources. Difficulties encountered in successfully integrating acquired companies and products may adversely affect the Company's business, financial condition and operating results.

In March 2002, Moody's Investors Service downgraded the Company's senior unsecured long-term debt rating and shifted its rating outlook on the Company from stable to negative. In addition, in February 2002 Standard & Poor's revised its rating outlook on the Company from stable to negative. The Company cannot assure investors that Moody's, Standard & Poor's or any other rating agency will not further downgrade the Company's credit ratings in the future. If the Company's credit ratings are downgraded, it could be required to, among other things, pay additional interest under its credit agreements or other debt. Any such downgrades could also affect the ability of the Company to obtain additional financing in the future and will affect the terms of any such financing.

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The Company's stock price is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or the Company's competitors, changes in domestic and international economic and business conditions, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to the Company's and that have been unrelated to the operating performance of these companies. These market fluctuations have in the past adversely affected and may continue to adversely affect the market price of the Company's common stock.

Acts of terrorism, acts of war and other unforeseen events, may cause damage or disruption to the Company's properties, business, employees, suppliers, distributors, resellers and customers, which could have an adverse effect on the Company's business, financial condition and operating results. Such events may also result in an economic slowdown in the United States or elsewhere, which could adversely affect the Company's business, financial condition and operating results.

The World Trade Organization (WTO) recently authorized sanctions against the United States for operating the extraterritorial income regime. This regime relates to a provision in the United States Tax Code providing tax incentives on products manufactured in the United States and exported for sale. The WTO has ruled the regime to be an illegal export subsidy and has now authorized the European Union (EU) to impose tariffs on certain United States-made products imported into the EU. EU officials have indicated that they will not raise tariffs provided that the United States shows substantial progress and a commitment to act within the next year. The Company cannot be certain, however, what impact the potential EU tariffs could have on the software industry or the economy in general. Additionally, the Company cannot be certain that any legislation replacing the extraterritorial income regime will continue to provide the Company with the level of tax incentives received under the existing regime. The Company currently saves approximately $12 million per year in United States federal income tax under the current extraterritorial income regime.

The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio, debt, and installment accounts receivable. The Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers (Standard & Poor's single "A" rating and higher). To mitigate risk, many of the securities have a maturity date within one year, and holdings of any one issuer excluding the U.S. Government do not exceed 10% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated. The Company does not utilize derivative financial instruments.

The Company maintains a blend of both fixed and floating rate debt instruments. As of September 30, 2002, the Company's outstanding debt approximated $3.1 billion, with approximately $2.3 billion in fixed rate obligations. If market rates were to decline, the Company could be required to make payments on the fixed rate debt that would exceed those based on current market rates. Each 25 basis point decrease in interest rates would have an associated annual opportunity cost of approximately $6 million. Each 25 basis point increase or decrease in interest rates would have an approximate $2 million annual effect on variable rate debt interest based on the balances of such debt as of September 30, 2002.

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Under the Company's old Business Model, the Company offered financing arrangements with installment payment terms in connection with its software solution sales. The aggregate amounts due from customers includes an imputed interest element, which can vary with the interest rate environment. Each 25 basis point increase in interest rates would have an associated annual opportunity cost of approximately $10 million.

The Company conducts business on a worldwide basis through subsidiaries in 45 countries. The Company is therefore exposed to movement in currency exchange rates. As part of its risk management strategy and consistent with prior years, the Company did not enter into any foreign exchange derivative transactions. In addition, the Company manages its level of exposure by denominating a majority of international sales and payments of related expense in the local currency of its subsidiaries. A 1% decline in all foreign currencies against the U.S. dollar would have an insignificant effect on the Company's net loss.

The Company has minimal investments in marketable equity securities of publicly-traded companies. As of September 30, 2002, these investments were considered available-for-sale with any unrealized gains or losses deferred as a component of stockholders' equity. It is not customary for the Company to make investments in equity securities as part of its investment strategy.

Within 90 days prior to the date of this report (the Evaluation Date), the Company's President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c)). Based on that evaluation, these officers have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company's consolidated subsidiaries would be made known to them by others within those entities.

There were no significant changes in the Company's internal controls, or to the Company's knowledge, in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date.

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if any, cannot be determined, the Company believes that the facts do not support the claims in these lawsuits and that the Company and its officers and directors have meritorious defenses. In the opinion of management, resolution of these lawsuits is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of any of these matters, however, the Company's earnings and cash flows in one or more periods could be materially adversely affected.

On September 28, 2001, the United States Department of Justice filed a lawsuit alleging that the Company and PLATINUM had violated Federal antitrust laws, including alleged violation of the waiting period under the Hart-Scott-Rodino Act, in connection with the Company's acquisition of PLATINUM in May 1999. On April 23, 2002, the Company reached a settlement with the Department of Justice pursuant to which the Company will not admit any wrongdoing and will pay the government $638,000 once the settlement becomes final.

Since February 2002, the Company has been cooperating with a joint inquiry by the United States Attorney's Office for the Eastern District of New York and the staff of the Northeast Regional Office of the Securities and Exchange Commission concerning certain of the Company's accounting practices. The investigation appears generally to be focusing on issues relating to the Company's historical revenue recognition policies and practices. The Company has produced documents and information in response to a request for the voluntary production of documents and understands that third parties have received subpoenas from the SEC for documents issued pursuant to a formal order of investigation. Such an order gives the SEC staff authority to issue subpoenas and take testimony, though the Company understands that the issuance of such an order does not reflect any finding or determination that any violation of law has occurred. The Company intends to continue to cooperate fully with the inquiry. At t his point, the Company cannot predict the scope or outcome of the inquiry, which may include the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, or other remedies and sanctions. The Company also cannot predict what impact, if any, the inquiry may have on the Company's results of operations or financial condition.

In April 2002, a derivative suit against the current directors of the Company (except Messrs. Kenneth Cron, Robert E. La Blanc, Jay W. Lorsch, Walter P. Schuetze, Alex Serge Vieux, Thomas H. Wyman and William S. Stavropoulos) and certain former directors was filed in the Chancery Court in Delaware alleging breach of their fiduciary duties resulting in damages to the Company of an unspecified amount. This derivative suit is based on essentially the same allegations as those contained in the February and March 2002 stockholder lawsuits. Additionally, in June 2002, a derivative suit against the current directors of the Company (except Messrs. Cron, La Blanc, Lorsch, Schuetze, Vieux, Wyman and Stavropoulos) and certain former directors and officers of the Company, as well as Ernst & Young LLP and KPMG LLP (the Company's former and current independent auditors, respectively), was filed in New York State Supreme Court, Suffolk County. This derivative suit also is based on essentially the s ame underlying allegations as those contained in the February and March 2002 stockholder lawsuits, and in addition alleges that the management director and officer defendants sold common stock of the Company from June 1999 through February 2002 while in possession of material non-public information concerning the Company. This suit alleges breach of fiduciary duties, waste and misappropriation of corporate assets, and damages to the Company in an unspecified amount, and in addition seeks the imposition of a constructive trust upon the profits allegedly realized from the sale of common stock of the Company.

In July 2002, two derivative suits against the current directors of the Company (except Mr. Stavropoulos), and in one case certain former directors, were filed in the Chancery Court in Delaware. These suits concern the payment to and standstill agreement with Sam Wyly and Ranger pursuant to which they agreed not to engage in a proxy contest with the Company for five years, and Mr. Wyly's non-compete agreement with the Company was extended. The suits generally allege breach of fiduciary duties, waste and misappropriation of corporate assets, and damages to the Company in an unspecified amount.

The Company, various subsidiaries and certain current and former officers have been named as defendants in other various claims and lawsuits arising in the normal course of business. The Company believes that it has meritorious defenses in connection with such claims and lawsuits and intends to vigorously contest each of them. In the opinion of the Company's management, the results of these other claims and lawsuits, either individually or in the aggregate, are not expected to have a material effect on the Company's results of operations, financial position or cash flows.

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    15.1 Accountants' acknowledgement letter
    99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K:

    The Registrant filed a Report on Form 8-K dated August 9, 2002 to report an event under Items 7 and 9.
    The Registrant filed a Report on Form 8-K dated September 13, 2002 to report an event under Item 9.

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