The aggregate market value of the common stock held by non-affiliates of the Registrant as of September 30, 2002 was $4,294,127,856 based on the closing price on the New York Stock Exchange on that date which was $9.60.

Number of shares of common stock outstanding at May 12, 2003:
578,080,241 shares of Common Stock, par value $.10 per share.

Documents Incorporated by Reference:
Part III - Proxy Statement to be issued in conjunction with the Registrant's Annual Stockholders' Meeting.

This Annual Report on Form 10-K contains certain forward-looking statements and information relating to Computer Associates International, Inc. (the "Company," "Registrant," "CA," "We," "Our," or "Us") that are based on the beliefs of and assumptions made by our management as well as information currently available to management.  When used in this document, the words "anticipate," "believe," "estimate," "expect," and similar expressions, are intended to identify forward-looking statements.  Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions, some of which are described under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors."  Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this document as anticipated, believed, estimated, or expected.  We do not intend to update these forward-looking statements except as may be required by law.

PART I

Item 1. Business

(a) General Development of Business

Overview

Incorporated in Delaware in 1974, today we are one of the world's largest business software companies.  We commenced operations in 1976, and we completed an initial public offering of common stock in December 1981.  Our common stock is traded on the New York Stock Exchange under the symbol "CA".

We design, market, and license computer software products that allow businesses to run and manage critical aspects of their information technology operations and that allow data center managers and programmers to automate their daily functions.  We are considered an Independent Software Vendor (ISV).  ISVs develop and sell software products that run on one or more computer hardware platforms or operating systems sold by other vendors.  The companies that make the computer hardware and operating systems - like Microsoft, IBM, Hewlett-Packard, Sun Microsystems and others - generally encourage and support ISVs.  ISVs develop software products that can be added to the hardware platform or operating system to make it run more efficiently or to provide added functionality.  In some cases, these computer hardware and operating system vendors sell software that competes with the software that we license.

We believe that our success and results are driven by three critical areas of focus - our employees, having a wide range of software products, and having a large, diverse customer base. 

Attracting and retaining skilled employees to develop and enhance our software products and to support our customers is critical to our success.  It is a goal of our employees to consistently support our Core Values - - customers first, performance, quality and innovation, teamwork with focus, and shareholder value.  These Core Values provide the framework for our employees to perform their functions and responsibilities.

We have a broad portfolio of software products that are designed to operate with all major computer hardware platforms and software operating systems.  Our software products include those that we have sold for many years, as well as newer, enhanced products that address our customers' current technology needs.  Our software products are used for different business purposes and, where appropriate, are specifically designed to work well with other CA software products.  Because the cost to make different software products work together appropriately is generally high, customers place value on software products that work well with one another.  Our software products are also designed to work with products marketed by other companies.  We have approximately 430 product families that represent distinct areas of functionality.  The number of individual software products within each family generally ranges from several to several hundred.

We have a large and broad customer base for our software products.  More than 95% of the Fortune 500^® companies use our software products.  When customers enter into a software license agreement with us, they generally pay for the right to use our software for a specified period of time.  Upon the expiration of the term of the agreement, the customer must either renew the license agreement or pay usage/maintenance fees, if applicable, for the right to continue to use our software and receive support.  We generally experience renewal rates of approximately 80%.  We believe that the existing relationships with our customers provide us the opportunity to cross-sell new software products to them.

Business Developments

In fiscal year 2001, we announced a strategy intended to improve shareholder value by spinning off or divesting software products that have the potential to succeed on their own.  These actions are intended to allow us to focus more on our core software products.

2

Back to Index

In April 2002, we completed the divestiture of certain non-core assets to SSA Global Technologies, Inc. (SSA).  These assets consisted principally of our supply-chain management, financial management, and human resource management software product groups operating under the name interBiz™.  Of the $25 million selling price, approximately $12 million was received in the quarter ended June 30, 2002.  In January 2003, an agreement was reached to offset the remaining selling price SSA owed to us against obligations we owed to SSA.

In October 2002, we completed the divestiture of our banking products group to a third party for approximately $8 million in cash.  The banking product group was the remaining product group operating under the name interBiz.

Our wholly-owned subsidiary, ACCPAC International, Inc. (ACCPAC), which sells accounting and human resource application software, is preparing an initial public offering of its common stock.  There can be no assurance that the offering will be completed.

In fiscal year 2001, we divested the Federal Systems Group, the governmental consulting services division of a company we acquired in fiscal year 2000, Sterling Software, Inc. (Sterling), to Northrop Grumman for approximately $150 million in cash.

(b) Financial Information About Segments

Our global business is principally in a single industry segment - the design, development, marketing, licensing, and support of software products that can operate on a wide range of hardware platforms and operating systems.

See Note 4 of the Notes to the Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.

(c) Narrative Description of Business

Products

As an ISV, our software products are designed to work with almost every commercially available computer hardware platform and with all types of common software operating systems.  In most cases, customers use a combination of vendors that provide different hardware platforms and operating systems.  Our software products are designed to work with these different vendor offerings. 

Our software products address our customers' IT requirements in the following six areas: enterprise management; security; storage; application life cycle management; data management and application development; and portal and business intelligence.  Our software products generally fall within one of our six brands and are supported by CA Common Services™ and Portal Technology (described below) so that each software product can stand alone or work together with other CA software products.

CA Common Services and Portal Technology - CA Common Services is a term used to describe the common language used by our software products that allows our software products and those from other companies to work together.  We believe CA Common Services improves efficiency and reduces the problems associated with running multiple software products.  Through CA Common Services, all of our software products can be used independently or in combination with other companies' software products, and our customers can choose which of our software products, or combination of our software products, best meet their business needs.  Our Portal Technology gives customers a web-based, personalized view incorporating the functionality of our software products.  This Portal Technology is common to all of our software products. 

Six Product Areas:

Unicenter^® for Enterprise Management - Our Unicenter products are designed to improve the efficiency and responsiveness of our customers' computing operations.  These products identify system failures within a customer's data center.  When there is an interruption or failure in a data center, the majority of time is spent locating the problem and the "downtime" can be very costly.  By identifying such problems quickly, this cost is minimized.  These products also automate time-consuming tasks, like software installation and tracking computing assets, allowing customers to focus on other important issues.  Additionally, our Unicenter products help manage a customer's stored electronic information, web servers, and software applications, all of which help improve efficiency and responsiveness.  We offer Unicenter products across the following three major solution areas:

Back to Index

BrightStor^® for Storage - The amount of data a company collects increases daily.  Companies need to copy data to secure tapes, disks, or computer hard drives.  We believe it is difficult for a company to identify the amount of software and hardware computing space it has available to store this data.  As a result, companies often under-utilize available space.  Our BrightStor products are designed to help customers identify computing resources available to store data and allow for less-costly storage, management, and protection of the data.  Our BrightStor offerings include products to protect, backup, retrieve and manage data.   Such products include BrightStor^® ARCserve^® Backup, BrightStor^® Enterprise Backup, BrightStor^® Mobile Backup, BrightStor^® SAN Manager, BrightStor^® Storage Resource Manager, BrightStor^® CA-Disk^TM Interface, BrightStor^® CA-Vantage^TM Storage Resource Manager, and BrightStor^® CA-1^® Tape Management.

AllFusion™ for Application Life Cycle Management - Our AllFusion products keep track of the full development cycle of new software and subsequent modifications.  These products are designed to allow customers to automate the documentation of the new software development process from planning and design through testing and implementation.  We believe our AllFusion products help customers increase staff productivity, shorten development cycle times, control the complexity of application development, and ensure the new software is helping their business.  Products include AllFusion^TM ERwin^® Data Modeler, AllFusion^TM Harvest Change Manager, AllFusion^TM Endevor^® Change Manager, and a full set of process improvement tools in the AllFusion^TM Process Management suite.

Advantage™ for Data Management and Application Development - Our Advantage Data Management products help customers store large amounts of data.  Our Application Development tools help customers reduce the number of steps in the process of developing new software applications.  Our Data Management and Application Development products together help customers automate, standardize, and improve the processes they use to build and maintain vital company information.  We believe these products help customers quickly respond to sales opportunities, customer requests, and feedback by giving customers a cost-effective approach.  Products include Advantage^TM Gen, Advantage^TM EDBC^®, Advantage^TM CA-Datacom^®, Advantage^TM Data Transformer, and Advantage^TM CA-IDMS^®.

4

Back to Index

CleverPath™ Portal and Business Intelligence - Our CleverPath products are designed to help customers collect, sort, and analyze information that exists within their business.  Our aim is to help customers deploy and derive value from this information quickly.  We believe our products provide our customers with the most current, accurate, and relevant information they need to make the best possible decisions for their businesses.  Products include CleverPath^TM Portal, CleverPath^TM Aion^® Business Rules Expert, CleverPath^TM Reporter, CleverPath^TM Dashboard Option, and the CleverPath^TM Predictive Analysis Server.

Business Model

We have structured our business to place a greater emphasis on putting the customer at the center of everything we do.  To that end, in October 2000, we began the transition to a more flexible business model (the Business Model).  Our Business Model allows customers to license the software they currently need instead of licensing what they expect to use over a longer period of time.  Our Business Model is defined by three areas: licensing, which we have named "FlexSelect Licensing^SM," customer focus, and accountability.

5

Back to Index

Sales and Marketing

We distribute, market, and support our software products on a worldwide basis using our own employees and a network of independent, value-added resellers (VARs), distributors, and dealers.  As of March 31, 2003, we had approximately 5,500 sales and sales support personnel, including the pre-sales technical and the customer relations organizations.

Our sales organization operates on a worldwide basis.  Each geographic territory offers all or most of our software products.  A separate strategic accounts group within each territory provides additional services to large customers, including facilities managers.  Facilities managers deliver data processing services, using our software products, to those companies that prefer to use a third party to handle their computing processing operations.

We also operate through branches and subsidiaries located in 46 foreign countries.  Each of these organizations has a sales team that offers all or most of our software products in its respective territory.  Approximately 40% of our revenue in fiscal year 2003 was derived from operations outside the United States.  In addition, our software products are marketed by independent distributors in those limited, international locations where we do not have offices.  Revenue from such independent distributors accounted for less than 1% of our fiscal year 2003 revenue.

Under certain circumstances, we have customers and other third parties, such as Original Equipment Manufacturers (OEMs), sell some of our software products on a non-exclusive basis.  We also actively encourage VARs to market our software products.  VARs often provide customers with a complete solution by combining our software products with specialized consulting services.  These VARs generally service a particular market or sector and provide enhanced user-specific solutions.

During the past several years, we have formed a number of joint ventures with leading technology providers throughout Asia.  By aligning with local technology providers in a particular geographic area, these joint ventures offer additional avenues through which we can market and sell our software products to customers.  Many of these joint ventures are in the early stages of operations.

Our marketing groups produce all of the user documentation for our software products, as well as promotional brochures, advertising, and other related materials.  These groups perform all phases of creative development and production, including writing, editing, typesetting, and the printing of these materials.

Quality

We are the first and only enterprise software developer to receive ISO 9001:2000 certification across our entire company.  This certification is recognized globally as the highest standard of quality a company can achieve within the ISO 9000 series of standards.  Quality initiatives include documentation of processes, definition of skill sets of individuals, and review and audit for compliance.

Specifically in our development organization, we use a Software Development Methodology (SDM) that is designed to standardize all of our development life cycle systems and procedures.  The goal is to reduce the probability of mistakes, errors, or bad decisions.

We recently implemented Project 360°, a company-wide initiative designed to integrate development and marketing efforts and improve communications throughout CA.  By driving better teamwork among all departments, we believe we can deliver relevant, customer-focused software products to market faster than ever before.  Project 360° builds on our SDM to further enhance our product life cycle.

Product Development

We strive to give our customers the software products they need to run their businesses and increase the flexibility of their networks.  To date, we have received more than 200 patents worldwide and have more than 900 patents pending for our software products.

We have been able to adapt our software products to the rapid changes in the computer industry, and we anticipate that we will also be able to do so in the future.  In order to ensure our software products are compatible with computer hardware changes, we have a policy of continually improving and adding new features to our software products, as well as developing new software products.  We expect that we will continue to be able to improve our software products to work with the latest hardware platforms and operating systems.

6

Back to Index

We have several programs designed to involve customers throughout our software product development process.  The Development Buddy^TM Program gives customers direct access to our development resources and that provides us with feedback to help produce new software products.  Our Beta Software Program involves delivery of a new software product first to select customers for testing in our customers' operations before we make the product available to all new and existing customers.  We have a Product Advisory Council, which is made up of experienced IT professionals who act as independent advisers to help us design effective development strategies and produce new, enhanced software products.  We also strengthen our partnerships and our software solutions through more than 250 recognized worldwide user groups.  These are made up of licensed customers who actively communicate with each other and with us about our software products.  Each of these programs provides us with direct feedback that we use to develop and enhance our software products.

In addition to enhancing our current software products, we pursue "next-generation" technologies that we believe our customers have asked for to enhance their businesses.  Our research and development efforts, across all of our brands, include emerging technologies such as:

Some of our software products were acquired from other companies and individuals.  We continually seek to complement or improve our software products through acquisitions and strategic partnerships.  The purchase price of acquired software products (purchased software) is capitalized and amortized over the estimated useful life of such products over a period not exceeding seven years.

Proprietary Rights

Our software products are treated as trade secrets, which contain confidential information.  We protect our confidential information through contractual agreements with customers as well as our own security systems and confidentiality procedures.  In addition to obtaining patent protection for new technology, we protect our software products, product documentation, and other written materials under copyright law.  We believe that the approximate 20-year protection for our patented technology provides a competitive advantage in the marketplace.  We also obtain trademark and service mark protection for our various product names and services.  We plan to continue to build upon our current base of patents and trademarks in fiscal year 2004.

Competition and Risks

Current and potential stockholders should consider carefully the risk factors described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."  Any of these factors, or others, many of which are beyond our control, could negatively affect our future business, financial condition, operating results, and cash flow.

Customers

No individual customer accounted for a material portion of our revenue during any of the past three fiscal years or a material portion of deferred subscription revenue reported in the balance sheet at the end of any period in the past three fiscal years.  The majority of our software products are used with relatively expensive computer hardware.  As a result, most of our revenue is generated from customers who have the ability to make substantial commitments to software and hardware implementations.  Our software products are generally used in a broad range of industries, businesses, and applications.  Our customers include, among others, manufacturers, technology companies, retailers, financial services providers, banks, insurance companies, educational institutions, healthcare institutions, and government agencies.

7

Back to Index

Employees

As of March 31, 2003, we had approximately 16,000 employees.  Of this total, approximately 2,600 were located at our headquarters facility in Islandia, New York; approximately 6,500 were located at other offices in the United States; and approximately 6,900 were located at our offices in foreign countries.  Of the total employees, approximately 4,700 were engaged in product development efforts; 1,900 were part of our professional services organization; and 5,500 were engaged in sales and support functions, including the pre-sales technical and customer relations organizations.  We believe our employee relations are satisfactory.  In connection with the restructuring of the U.S. channel sales organization and the combination of the pre and post sales technical organizations in April 2003, we announced that approximately 450 positions worldwide would be eliminated in the first quarter of fiscal year 2004.

(d) Financial Information About Geographic Areas

See Note 4 of the Notes to the Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.

(e) Available Information

Our website address is www.ca.com.  All filings we make with the SEC, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and any amendments thereto, are available for free on our website as soon as reasonably practicable after they are filed or furnished to the SEC.  Our website also contains information about our initiatives in corporate governance, including the adoption of corporate governance principles and other actions during fiscal year 2003.  See www.ca.com/governance for details.  Our filings are also available on the SEC's website at www.sec.gov.  The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Item 2. Properties

Our principal real estate properties are located in areas necessary to meet sales and operating requirements.  All of the properties are generally considered to be both suitable and adequate to meet current operating requirements.

We lease approximately 112 office facilities throughout the United States.  We have approximately 154 office facilities outside the United States.  Expiration dates on significant lease obligations extend to 2023.

We own an 850,000 square foot corporate headquarters in Islandia, New York, as well as various office facilities throughout the United States ranging from 2,000 to 250,000 square feet.  We own one office facility in Germany totaling approximately 100,000 square feet, one office facility in Italy with approximately 140,000 square feet, and a 250,000 square foot European headquarters in the United Kingdom.

We own and lease various computer, telecommunications, electronic, and transportation equipment.  We also lease mainframe and distributed computers at our facilities in Islandia, New York, and Lisle, Illinois.  This equipment is used for internal product development, technical support efforts, and administrative purposes.  We consider our computer and other equipment to be adequate for our needs.  See Note 7 of the Notes to the Consolidated Financial Statements for information concerning lease obligations.

Item 3. Legal Proceedings

The Company, the former Chairman of the Company, Charles B. Wang, Sanjay Kumar, and Russell M. Artzt are defendants in a number of stockholder class action lawsuits, the first of which was filed July 23, 1998, alleging that a class consisting of all persons who purchased the Company's common stock during the period January 20, 1998 until July 22, 1998 were harmed by misleading statements, misrepresentations, and omissions regarding the Company's future financial performance.  These cases, which seek monetary damages, have been consolidated into a single action in the United States District Court for the Eastern District of New York, the proposed class has been certified, and discovery is substantially complete.  Additionally, in February and March 2002, a number of stockholder lawsuits were filed in the U.S. District Court for the Eastern District of New York against the Company and Messrs. Wang, Kumar, Ira H. Zar, the Company's Chief Financial Officer, and in one instance Mr. Artzt.  The lawsuits generally allege, among other things, that the Company made misleading statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading in connection with the Company's financial performance.  Each of the named individual plaintiffs in the 2002 lawsuits seeks to represent a class consisting of purchasers of the Company's common stock and call options and sellers of put options for the period May 28, 1999 through February 25, 2002.  The 2002 cases have been consolidated, and the Company's former

8

Back to Index

independent auditor, Ernst & Young LLP, has been named as a defendant, but class action status has not yet been certified and discovery has not been taken.  In addition, in November 2002, a class action lawsuit captioned Dana L. King v. Computer Associates International, Inc., et al. was filed in the U.S. District Court for the Eastern District of New York.  The complaint in this matter, a purported class action on behalf of the Computer Associates Savings Harvest Plan (the CASH Plan) and the participants and beneficiaries of the CASH Plan for a class period running from March 30, 1998 through November 25, 2002, asserts claims of breach of fiduciary duty under ERISA, the federal Employee Retirement Security Act.  The named defendants are the Company, the Company's Board of Directors, the CASH Plan, the Administrative Committee of the CASH Plan, and the following current or former employees and/or Board members of the Company: Charles B. Wang; Sanjay Kumar; Ira Zar; Russell M. Artzt; Willem F.P. de Vogel; Irving Goldstein (now deceased); Richard A. Grasso; Shirley Strum Kenny; Alfonse M. D'Amato; Roel Pieper; Lewis S. Ranieri; Linus W. L. Cheung; Jay W. Lorsch; Robert E. La Blanc; Alex Serge Vieux; Thomas H. Wyman (now deceased); and various unidentified alleged fiduciaries of the CASH Plan.  The complaint alleges that the defendants breached their fiduciary duties by causing the CASH Plan to invest in Company securities and seeks damages in an unspecified amount.  No response to the complaint is due until questions regarding the standing of the named plaintiff have been resolved.  Although the ultimate outcome and liability, 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.

As previously reported, the Company has been providing documents and other information to 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 in connection with an ongoing investigation concerning certain of the Company's accounting practices.  At this 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, suspensions or disbarments from government contracts, or other remedies and sanctions.  The Company also cannot predict what impact, if any, the inquiry may have on its results of operations or financial condition.

Two derivative lawsuits have been filed against certain current and former directors of the Company, which are based on essentially the same allegations as those contained in the February and March 2002 stockholder lawsuits (discussed above).  The first action was commenced in April 2002 in Delaware Chancery Court and alleges that certain former and current directors of the Company (except Messrs. Kenneth Cron, Robert E. La Blanc, Jay W. Lorsch, Walter P. Schuetze, and Alex Serge Vieux) breached their fiduciary duties resulting in alleged damages to the Company of an unspecified amount.  The second derivative lawsuit was commenced in June 2002, in New York State Supreme Court, Suffolk County, against certain former and current directors of the Company (except Messrs. Cron, La Blanc, Lorsch, Schuetze, and Vieux), as well as Ernst & Young LLP and KPMG LLP (the Company's former and current independent auditor, respectively).  This second action, which alleged claims similar to those alleged in the derivative action pending in Delaware Chancery Court, also alleged that certain management director defendants sold common stock of the Company during the period June 1999 through February 2002 while in possession of material non-public information concerning the Company.  This second action was dismissed without prejudice in or about November 2002.  Thereafter, the complaint in the derivative action pending in Delaware Chancery Court was amended to withdraw claims against one former director, Mr. Linus Wing Lam Cheung, and add allegations of insider trading by certain management director defendants.  The amended complaint in the derivative action pending in Delaware Chancery Court alleges breach of fiduciary duties and misappropriation of confidential, material information, and seeks an accounting and recovery of an unspecified amount of damages, including recovery of the profits allegedly realized from the sale of common stock of the Company.

In July 2002, two derivative lawsuits against the current directors of the Company, and certain former directors, were filed in the Chancery Court in Delaware.  These lawsuits concern the payment to and standstill agreement with Sam Wyly and Ranger Governance Ltd. (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 lawsuits 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 various other 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.

9

Back to Index

Item 4. Submission of Matters to Vote of Security Holders

None.

Executive Officers of the Registrant

The name, age, present position, and business experience of all executive officers of the Company as of May 14, 2003, are listed below:

(1) Member of the Corporate Operations Committee of the Board of Directors.

Mr. Kumar joined the Company with the acquisition of UCCEL in August 1987.  He was named Chairman of the Board of Directors in November 2002, Chief Executive Officer in August 2000, and has been President and a Director since January 1994.  Mr. Kumar previously served as Chief Operating Officer from January 1994 to August 2000; as Executive Vice President - - Operations from January 1993 to December 1993; and Senior Vice President - Planning from April 1989 to December 1992.

Mr. Artzt has been with the Company since June 1976.  He has been an Executive Vice President since April 1987 and a Director of the Company since November 1980.

Mr. Quinn has been an Executive Vice President - Sales Support since April 2000.  He was an Executive Vice President - Global Information and Administrative Services from April 1998 to April 2000; and was a Senior Vice President - Global Information Services from April 1996 to April 1998.  Prior to 1998, he served in various management positions within the marketing and technical organizations.  He joined the Company in December 1985.

Mr. Richards has been an Executive Vice President - Sales since February 2000.  He was Senior Vice President - Sales from April 1998 to February 2000; and was Senior Vice President - Pacific Region from 1995 through February 2000.  He joined the Company in May 1988.

Mr. Zar has been Chief Financial Officer since June 1998.  He was named Executive Vice President in April 1999.  He was a Senior Vice President - Finance from April 1994 to April 1999; and Treasurer from April 1994 to October 1997.  Mr. Zar joined the Company in June 1982.

Mr. Woghin has been General Counsel since February 1995.  He was named Senior Vice President at the same time, having previously been a Vice President - Legal from 1993 to February 1995.  He joined the Company in March 1992.

Ms. Stravinskas was elected Treasurer effective May 2001.  She was named Vice President in 1999, having previously been an Assistant Vice President and a manager of various functions within the finance organization.  She joined the Company in February 1986.

Mr. Lamm joined the Company and was named Director of Corporate Governance and Corporate Secretary in October 2002.  From May 2000 through September 2002, he was a shareholder and Chair of the Securities and Corporate Governance Practice Group of Gunster, Yoakley & Stewart, P.A., in West Palm Beach, Florida.  He was Senior Vice President, General Counsel, and Secretary of Hvide Marine Incorporated from 1998 to 2000, and he previously served as Vice President and Secretary of W. R. Grace & Co.  Hvide Marine filed for Chapter 11 bankruptcy protection in September 1999 and emerged from Chapter 11 in December 1999 under a plan of reorganization.

The officers are appointed annually and serve at the discretion of the Board of Directors.

10

Back to Index

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 following table sets forth, for the quarters indicated, the quarterly high and low sales prices on the New York Stock Exchange:

Item 6. Selected Financial Data

The information set forth below should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This "Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)," and in particular the Outlook section of this MD&A, contains certain forward-looking statements and information relating to us that are based on the beliefs of and assumptions made by management, as well as information currently available to management.  When used in this document, the words "anticipate," "believe," "estimate," "expect," and similar expressions are intended to identify forward-looking statements.  Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions, some of which are described below in the section "Risks and Uncertainties."  Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this document as anticipated, believed, estimated, or expected.  We do not intend to update these forward-looking statements except as may be required by law.

11

Back to Index

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the Consolidated Financial Statements and Footnotes to help provide an understanding of our financial condition, change in financial condition, cash flows, and results of operations.  The MD&A is organized as follows:

12

Back to Index

Performance Indicators

The following is a summary of some of the quantitative performance indicators that may be used to assess our financial results and condition:

Subscription Revenue - Subscription revenue is the ratable revenue recognized in a period from amounts previously recorded as deferred subscription revenue.  Subscription revenue also includes revenue earned from monthly licenses.  The larger the ratio of subscription revenue to total revenue, the more predictable our revenue streams become.  A change in subscription revenue is correlated with a change in deferred subscription revenue, and therefore, since we expect an increase in deferred subscription revenue, we also expect subscription revenue to increase in fiscal year 2004.

Total Revenue - Total revenue is the sum of all revenue line items.  Although subscription revenue continues to increase, certain other revenue line items in our Consolidated Statements of Operations are decreasing.  As we noted in our previous filings, these decreases were generally expected.  We expected decreases in the Maintenance, Financing fees, and Professional services line items as described in further detail below.  Software fees and other, which largely represents software revenues from our channel and OEM business, decreased more than we expected in fiscal year 2003.  For a more complete description of the reasons why each revenue item increased or decreased, refer to the Results of Operations section below.

New Deferred Subscription Revenue - New deferred subscription revenue represents the total undiscounted incremental value (license agreement value) of all new software licenses sold in the current period by our direct sales force.  New deferred subscription revenue excludes the value associated with license agreements for maintenance only as well as professional service arrangements.  This new deferred subscription revenue is what we expect to collect from our customers.  This amount is recorded into subscription revenue evenly on a monthly basis over the applicable software license term.  These license agreements represent binding payment commitments from customers over periods generally up to three years.

Weighted-Average License Agreement Duration in Years - The weighted-average license agreement duration in years represents the sum of the duration of all software licenses executed during a fiscal year, weighted by each individual software license's contract value.  The calculation for fiscal year 2003 of 2.81 years was derived from the following quarterly new deferred subscription revenue amounts recorded and weighted-average durations in years, respectively: Q1 - $322 million, 2.75 years; Q2 - $394 million, 2.80 years; Q3 - $538 million, 2.80 years; and Q4 - $629 million, 2.85 years.  For fiscal year 2002, the calculation of 3.67 years was derived from the following quarterly new deferred subscription revenue amounts recorded and weighted-average durations in years, respectively: Q1 - $502 million, 4.00 years; Q2 - $466 million, 3.75 years; Q3 - - $554 million, 3.50 years; and Q4 - $656 million, 3.50 years.  We believe license agreement durations averaging approximately three years, which is lower than the historical duration of our contracts, increase the value the customer receives from our software licenses by giving customers the flexibility to vary their software mix as their needs change.  We also believe this flexibility improves our customer relationships and encourages greater accountability by the Company to each of our customers, which in turn may lead to increased future sales opportunities.

Cash From Operations - Cash from operations from our Consolidated Statements of Cash Flows represents the excess of cash collected from billings to our customers over cash paid for expenses to run our business.  This amount represents what is available to pay for equipment, technology, and other investing activities, to repay debt, pay dividends, buy back stock, or for other financing purposes.  We believe this is an important performance indicator since cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth.  We believe generating consistently strong cash from operations is an indication that we are achieving a high level of customer satisfaction with our products and are appropriately managing our expenses. 

13

Back to Index

Net Loss - Under our Business Model, revenue is deferred and recognized evenly on a monthly basis whereas under the prior business model, license revenue was generally recognized up-front.  However, costs continued to be expensed as incurred.  As a result, we have experienced net losses.  As we increase revenue and maintain our cost structure, we anticipate returning to a net profit.  The decrease in net loss from fiscal year 2002 to 2003 was attributable to, among other things, our adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," whereby we no longer amortize goodwill.  Goodwill amortization was approximately $449 million in fiscal year 2002. 

Total Debt - Total debt includes the current and long-term portions of our debt obligations.  We have made a strategic decision to reduce our overall debt level and have achieved a $1.3 billion reduction during the last two fiscal years. 

Refer to the discussion of our Results of Operations and Risk Factors herein and the Notes to the Consolidated Financial Statements for further discussion of the items discussed in this section.

Results of Operations

The following table presents the percentage of total revenue and the percentage of period-over-period dollar change for the line items in our Consolidated Statements of Operations for the fiscal years ended March 31, 2003, 2002, and 2001.  These comparisons of financial results are not necessarily indicative of future results.

Note - Amounts may not add to their respective totals due to rounding.

Total Revenue

Total revenue for the fiscal year ended March 31, 2003 increased $152 million from the fiscal year ended March 31, 2002 to $3.116 billion.  This increase was primarily due to the transition to our Business Model that began during the third quarter of fiscal year 2001.  This transition resulted in an increase in subscription revenue from the prior fiscal year, partially offset by a decrease in maintenance and financing fees as described below.  Professional services and software fees and other revenue decreased for fiscal year 2003 as described below.  In addition, there was a positive impact to revenue of $81 million compared to fiscal year 2002 due to fluctuations in foreign currency exchange rates.  This foreign exchange rate impact was fully offset by the impact of the sale of our interBiz unit in April 2002, which had contributed approximately $82 million of revenue in fiscal year 2002.  Cautious capital spending by our existing and potential customers associated with weak conditions in the overall economy and the IT industry adversely impacted bookings of new license agreements and revenue in fiscal year 2003.

14

Back to Index

Total revenue for the fiscal year ended March 31, 2002 decreased $1.226 billion from the fiscal year ended March 31, 2001, to $2.964 billion.  This decrease was primarily due to the transition to our Business Model beginning in the third quarter of fiscal year 2001, which resulted in a decrease in license fees recognized up-front compared to the prior year period, partially offset by new subscription revenue.  The period that license agreements were recorded prior to our Business Model is deemed the "prior business model."  In addition, apprehension toward capital spending by our existing and potential customers due to weakened conditions in the overall economy and the technology industry also impacted fiscal year 2002 revenue.  During fiscal year 2001, approximately $1.429 billion was recognized as revenue up-front at license agreement signing under our prior business model and was included in the "Software fees and other" line item on the Consolidated Statements of Operations.  The total revenue decrease was also attributable to a decline in professional services revenue of $222 million, as described below.  Although the transition to our Business Model and weaker economic conditions contributed to the revenue decrease, quantification of the impact that each of these factors had on such decrease is not readily determinable.

Subscription Revenue

Subscription revenue for the fiscal year ended March 31, 2003 increased $587 million from fiscal year 2002 to $1.414 billion.  Subscription revenue represents the ratable portion of revenue recognized on software license agreements entered into under our Business Model.  Many of the licenses recorded between October 2000, when our Business Model began, and the end of fiscal year 2002, have terms of three years or greater.  Therefore, many did not expire during fiscal year 2003, and continue to contribute to subscription revenue on a monthly, ratable basis.  As a result, subscription revenue for fiscal year 2003 includes the ratable recognition of bookings recorded in fiscal year 2003, as well as most of the bookings recorded between October 2000 and the end of fiscal year 2002.  This is the main reason for the increase in subscription revenue in fiscal year 2003 versus fiscal year 2002.  During fiscal years 2003 and 2002, we added new deferred subscription revenue of $1.883 billion and $2.178 billion, respectively.  The approximate duration of license agreements executed under our Business Model in fiscal year 2003 and 2002 was a weighted-average life of approximately 2.81 years and 3.67 years, respectively.  Thus, annualized deferred subscription revenue, which represents the total value of all new software license agreements signed during a period divided by the weighted-average duration of all such license agreements recorded during the same period, increased approximately $77 million, or 13%, for fiscal year 2003 over the prior fiscal year to $670 million.  Subscription revenue also increased as a result of how we record maintenance revenue under our Business Model compared to the prior method.  Under our prior business model, maintenance revenue was separately identified and was recorded to the "Maintenance" line item on the Consolidated Statements of Operations.  Under our Business Model, bundled maintenance is not separately identified in our customers' license agreements and therefore is included within the "Subscription revenue" line item on the Consolidated Statements of Operations.  The quantification of the impact that each of these factors had on the increase in subscription revenue is not readily determinable.

Subscription revenue for the fiscal year ended March 31, 2002 increased $768 million from the prior fiscal year to $827 million.  The increase was primarily due to the introduction of our Business Model that began in the third quarter of fiscal year 2001.  Fiscal year 2002 included subscription revenue earned from software license agreements that were completed during the 12 months of fiscal year 2002.  These license agreements did not contribute to revenue in fiscal year 2001.  During fiscal years 2002 and 2001 we added new deferred subscription revenue of $2.178 billion and $1.934 billion, respectively.

Software Fees and Other

Software fees and other primarily consists of royalties and revenue related to distribution and OEM partners.  Revenue related to distribution partners and OEMs is sometimes referred to as our "indirect" or "channel" revenue.  For the fiscal year ended March 31, 2003, software fees and other decreased $37 million from the fiscal year ended March 31, 2002 to $395 million.  The decrease was primarily due to a difficult economic and competitive environment.

Software fees and other decreased during fiscal year 2002 by $1.449 billion from the fiscal year ended March 31, 2001 to $432 million.  During fiscal year 2001, the portion of revenue that we recognized up-front at the signing of a new license agreement under our prior business model of approximately $1.429 billion was recorded to the "Software fees and other" line item on the Consolidated Statements of Operations.  During the third quarter of fiscal year 2001, we switched to our Business Model and no longer recorded this revenue up-front.

Maintenance

As expected, maintenance revenue for fiscal years 2003 and 2002 decreased $189 million and $129 million, respectively, from the respective prior fiscal years to $769 million and $958 million, respectively.  The decrease in maintenance revenue for both years is attributable to additional license agreements signed under our Business Model where bundled maintenance revenue is now included with license revenue, which is reported in the "Subscription revenue" line item on the Consolidated Statements of Operations.  The combined maintenance and license revenue on these types of license agreements is recognized on a monthly basis ratably over the term of the agreement.  The decrease is partially offset by new maintenance revenue earned from customers who elect optional maintenance at the expiration of their non-term-based license agreements.  The quantification of the impact that each of these factors had on the decrease in maintenance revenue is not readily determinable.

15

Back to Index

Financing Fees

Financing fees result from the initial discounting to present value of product sales with extended payment terms under our prior business model, which required up-front revenue recognition.  This discount initially reduced the related installment accounts receivable, and was referred to as "unamortized discounts."  Over the life of the applicable license agreement, the related unamortized discount is amortized and reported as financing fees.  Under our Business Model, additional unamortized discounts are no longer recorded, since we do not account for the present value of product sales as earned revenue when license agreements are signed.  As expected, for fiscal years 2003 and 2002, financing fees decreased $154 million and $194 million, respectively, from the prior fiscal years to $290 million and $444 million, respectively.  The decrease for both years is attributable to the discontinuance of offering license agreements under our prior business model.

Professional Services

Professional services revenue for fiscal year 2003 decreased $55 million from fiscal year 2002 to $248 million.  The decrease was partially attributable to the divestiture of our interBiz unit in April 2002, which generated approximately $20 million of professional services revenue in fiscal year 2002.  The decrease was also a result of the weak spending environment that affected the IT service sector in general, as well as our continued shift in focus to professional services engagements that are focused solely on our software products.  Quantification of the impact that these factors had on the decrease in professional services revenue is not readily determinable.

Professional services revenue for fiscal year 2002 decreased $222 million from fiscal year 2001 to $303 million primarily as a result of our shift in focus to professional services engagements that are centered around our products.  The decrease was also attributable to our divestiture in October 2000 of Sterling's Federal Systems Group (FSG), a provider of professional services to governmental agencies, which contributed approximately $94 million to professional services revenue in fiscal year 2001.

Total Revenue by Geography

Revenue in the United States represented approximately 58% of overall revenue for fiscal year 2003, as compared to approximately 62% for fiscal year 2002.  International revenue increased $185 million, or 17%, in fiscal year 2003 as compared with fiscal year 2002.  Results in fiscal year 2002 included our interBiz operations, which we divested in April 2002.  Those operations contributed approximately $50 million and $32 million of revenue in the prior fiscal year from the United States and international regions, respectively.  The increases in international revenue were primarily attributable to an improvement in our business in Europe and Asia as well as the $81 million positive impact due to fluctuations in foreign currency exchange rates. 

Revenue in the United States represented 62% of overall revenue for fiscal year 2002, as compared to 65% for fiscal year 2001.  Consistent with the reasons for the overall decrease in revenue, international revenue decreased $343 million, or 23%, in fiscal year 2002 as compared with fiscal year 2001.

Price changes did not have a material impact in fiscal years 2003, 2002, or 2001.

Amortization of Capitalized Software Costs

Amortization of capitalized software costs consists of the amortization of both purchased software and capitalized internally generated software development costs.  Internally generated capitalized software costs are related to new products and significant enhancements to existing software products that have reached the technological feasibility stage.  Amortization of capitalized software costs for fiscal year 2003 decreased $17 million from the prior fiscal year to $470 million and for fiscal year 2002, decreased $5 million from fiscal year 2001 to $487 million.  We recorded amortization of purchased software products for the fiscal years ended March 31, 2003, 2002, and 2001 of $435 million, $455 million, and $467 million, respectively.  We recorded amortization of capitalized internally generated software development costs for the fiscal years ended March 31, 2003, 2002, and 2001 of $35 million, $32 million, and $25 million, respectively.  The total decrease for both years was due primarily to certain purchased software assets becoming fully amortized.

Cost of Professional Services

Cost of professional services consists primarily of the personnel-related costs associated with providing professional services and training to customers.  Cost of professional services for fiscal year 2003 decreased $46 million from fiscal year 2002 to $237 million.  This decrease was due primarily to a reduction in professional service engagements and related personnel costs.

16

Back to Index

Cost of professional services for fiscal year 2002 decreased $180 million from fiscal year 2001 to $283 million.  This decrease was due primarily to a reduction in professional service engagements and related personnel costs, including the divestiture of FSG, which contributed approximately $84 million of such expenses in the prior year.

Selling, General and Administrative (SG&A)

SG&A expenses for fiscal year 2003 decreased $296 million compared to fiscal year 2002 to $1.463 billion.  The decrease was attributable to our emphasis on overall cost control measures, including a reduction in personnel and personnel-related costs.  During fiscal year 2003, we had an average of approximately 16,000 employees.  This represents a decrease of approximately 1,500 employees from our fiscal year 2002 average of 17,500 employees, some of which were personnel costs that impacted other line items.  The reduction in headcount consisted of a reduction in workforce of approximately 900 employees in October 2001, approximately 725 employees from the divestiture of certain assets of our interBiz operations in April 2002, and approximately 80 employees from the divestiture of our banking product group in October 2002.  This reduction was partially offset by headcount additions in the current year primarily due to the opening of a new call center for telemarketing efforts.  Our interBiz unit contributed approximately $81 million of SG&A expenses in the prior fiscal year, the majority of which were personnel costs.  The decrease in SG&A expenses was also attributable to a reduction of the bad debt expense of $151 million, which relates to ongoing operations, and $14 million of bad debt expense that was recorded in fiscal year 2002 prior to the divestiture of the interBiz unit in April 2002.  This reduction reflects a decrease in installment accounts receivable related to the prior business model (see the Accounts Receivable section of Critical Accounting Policies and Business Practices for additional information).  In fiscal year 2002, we recorded a $28 million capitalized software impairment charge.  This amount was previously recorded as part of the fiscal year 2002 total impairment charge of $59 million related to the sale of interBiz.

SG&A expenses for fiscal year 2002 decreased $361 million compared to fiscal year 2001 to $1.759 billion.  The decrease was largely attributable to our emphasis on overall cost control measures, including a reduction in personnel and personnel-related costs, such as reduced travel expenses, in connection with a reduction in our headcount of approximately 3,000 employees over the prior fiscal year.  In fiscal year 2001, we recorded a charge associated with the bankruptcy of Inacom Corporation of approximately $31 million. 

Product Development and Enhancements

Product development and enhancement expenditures, also referred to as research and development, for fiscal year 2003 decreased $14 million compared to fiscal year 2002 to $664 million.  As a percentage of operating expenses, net research and development expenditures increased to approximately 20% in the current fiscal year, compared to approximately 19% in the prior fiscal year, excluding the amortization of goodwill and assembled workforce from fiscal year 2002 operating expenses.  We continued to focus on product development and enhancements, emerging technologies such as Linux, wireless and web services, and a broadening of our enterprise product offerings.

Product development and enhancement expenditures for fiscal year 2002 decreased $17 million from fiscal year 2001 to $678 million.  The decrease was a result of general cost containment, primarily related to personnel costs.  We continued our focus on product development and enhancements, with an emphasis on adapting and enhancing products within our focus areas, particularly for the distributed processing and IBM's z/OS environments, as well as a broadening of our enterprise product offerings.

Commissions and Royalties

Commissions and royalties for fiscal year 2003 decreased $24 million from fiscal year 2002 to $251 million.  This decrease was due primarily to an $11 million reduction in royalties paid to third parties resulting from continued internal product development and enhancements.  This decrease was also due to the reduction in sales and related commission expense associated with the divestiture of certain assets of our interBiz unit.  That unit contributed approximately $9 million of such expenses in fiscal year 2002.

Commissions and royalties for fiscal year 2002 decreased $33 million from fiscal year 2001 to $275 million.  Commissions and royalties expense as a percentage of revenue increased due to the lower revenue achievement associated with our transition to our Business Model without an associated change in the overall sales compensation.  The decrease in commissions and royalties expense was principally the result of a decline in license agreement bookings associated with the weaker economic environment for IT spending.

Depreciation and Amortization of Goodwill and Other Intangible Assets

Depreciation and amortization of goodwill and other intangible assets for fiscal year 2003 decreased $467 million from fiscal year 2002 to $142 million.  The decrease was primarily a result of adopting SFAS No. 142 in April 2002.  With SFAS No. 142, a non-amortization fair value based impairment approach is used to account for goodwill and certain intangible assets (see Note 1 to the Consolidated Financial Statements).  Upon adoption of SFAS No. 142, assembled workforce no longer met the definition of an identifiable intangible asset and, therefore, must be reclassified to goodwill and follow the non-amortization impairment approach.  As a result, the assembled workforce net balance of $79 million as of March 31, 2002 was reclassified to goodwill.  Prior to the adoption of SFAS No. 142, we amortized $449 million and $13 million of goodwill and the assembled workforce intangible asset, respectively, during fiscal year 2002.  On a per share basis, we recorded $.78 and $.02 of goodwill and the assembled workforce intangible asset amortization, respectively, during fiscal year 2002.

17

Back to Index

Depreciation and amortization of goodwill and other intangible assets for fiscal year 2002 decreased $9 million from fiscal year 2001 to $609 million.  The decrease in depreciation and amortization of goodwill and other intangible assets was a result of certain intangible assets from past acquisitions becoming fully amortized.

Goodwill Impairment

During the fourth quarter of fiscal year 2003, we performed our annual goodwill impairment review under SFAS No. 142 and recorded a non-cash goodwill impairment charge of $80 million related to our professional services organization.  The impairment is attributable to our lower than expected results and our projected performance.  See the Critical Accounting Policies and Business Practices section for additional information.

Under the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we recorded a non-cash impairment charge of $59 million during the fourth quarter of fiscal year 2002.  The charge related to the sale of certain assets, under the name interBiz, to SSA in April 2002.  The $59 million consisted of a $31 million goodwill impairment charge recorded to the "Goodwill impairment" line item on the Consolidated Statements of Operations and a $28 million capitalized software impairment charge recorded to the "SG&A" line item on the Consolidated Statements of Operations.

1995 Stock Plan

In fiscal year 2001, we recorded a gain of $184 million related to the settlement of the 1995 Key Employee Stock Ownership Plan (1995 Stock Plan) litigation.  Under the terms of the settlement, the 1995 Stock Plan participants returned 4.5 million shares of CA stock to the Company.

Net Interest Expense

Net interest expense for fiscal year 2003 decreased $55 million as compared to fiscal year 2002 to $172 million.  Of the change, $38 million was due to the decrease in average debt outstanding, $14 million was due to the decrease in the average variable interest rate, and $3 million was the result of gains from the early retirement of portions of our outstanding debt.  See Liquidity and Capital Resources and New Accounting Pronouncements regarding SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" for additional information.

Net interest expense for fiscal year 2002 decreased $117 million as compared to fiscal year 2001 to $227 million.  Of the change, $59 million was due to the decrease in average debt outstanding and $58 million was due to the decrease in the average variable interest rate.

Operating Margins

For fiscal year 2003, our pretax loss was $363 million as compared to a pretax loss of $1.385 billion in fiscal year 2002.  The decrease in pretax loss was primarily related to:

Our consolidated effective tax rate (benefit) was 26% and 20% for fiscal years 2003 and 2002, respectively.  The increased effective tax rate reflects the goodwill and the assembled workforce intangible assets that were amortized for financial statement purposes but not for tax purposes prior to fiscal year 2003, net of the fiscal year 2003 goodwill impairment charge.  Beginning with adoption of SFAS No. 142, these assets are no longer amortized for either financial statement or tax purposes.  Our effective tax rate (benefit) is below the statutory rate in fiscal year 2003 primarily due to the non-tax deductibility of the goodwill impairment charge.  Our effective tax rate (benefit) is below the statutory rate in fiscal year 2002 primarily due to the non-tax deductibility of goodwill amortization.

Outlook for Fiscal Year 2004

This outlook for fiscal year 2004 contains certain forward looking statements and information relating to us that are based on the beliefs and assumptions made by management, as well as information currently available to management.  Should business conditions change or should our assumptions prove incorrect, actual results may vary materially from those described below.  We do not intend to update these projections.

18

Back to Index

The outlook for the overall economy and the IT environment, complicated by recent international conflicts, continues to be difficult to predict.  The outlook for our fiscal year 2004 results comes from the assumption that there will be limited to modest improvement in the current economic and IT environments.  We also believe that customers will continue to be cautious with their technology purchases.

Our preliminary outlook for fiscal year 2004 is to generate revenue in the range of $3.275 billion to $3.425 billion, an increase of between 5% to 10%, and loss per share in the range of $(.10) to $(.05).

We expect that:

Back to Index

The above table provides sensitivity analysis related to the granting of stock options and the associated expense incurred over the vesting period of the option.  The assumptions used may vary significantly, which can result in a material change to the amounts presented above.

Selected Quarterly Information

Liquidity and Capital Resources

Cash, cash equivalents, and marketable securities totaled $1.512 billion on March 31, 2003, an increase of $332 million from the March 31, 2002 balance of $1.180 billion.  Net debt repayments approximated $700 million during fiscal year 2003.  We used cash on hand and cash from operations to repay more than $1.2 billion in outstanding debt, which was offset by the issuance of $460 million of new, unsecured 1.625% Convertible Senior Notes.  Additionally, we repurchased approximately $106 million in treasury stock in fiscal year 2003.  Cash generated from operations for fiscal year 2003 was $1.309 billion, an increase of $58 million from the prior year's cash from operations of $1.251 billion.  Cash from operations was favorably impacted this fiscal year compared with the prior fiscal year by savings in operating costs.

As of March 31, 2003 and 2002, our debt arrangements consisted of the following:

20

Back to Index

2002 Revolver

On December 31, 2002, we entered into a new, unsecured, bank revolving credit facility (the 2002 Revolver) of $400 million.  During the quarter ending March 31, 2003, the 2002 Revolver was increased to $440 million, and then in April 2003 it was further increased to a total capacity of $460 million.  The 2002 Revolver expires January 31, 2005, and no amount was drawn as of March 31, 2003.  The interest rates on the 2002 Revolver are determined based on a ratings grid, which applies a margin to the prevailing London InterBank Offered Rate (LIBOR).  We capitalized the initial transaction fees associated with the 2002 Revolver, which totaled approximately $6 million.  We are amortizing these fees over the term of the 2002 Revolver in the "Interest expense, net" line item on the Consolidated Statements of Operations.

1999 Revolver and 1999 Term Loan

Effective December 31, 2002, the amount that may be outstanding at any time under the existing $1 billion, four-year revolving credit facility (the 1999 Revolver), which expires on May 30, 2003, was reduced to $400 million.  As of March 31, 2003, $350 million was drawn under the 1999 Revolver.  The $600 million outstanding balance as of March 31, 2002, on the then-existing $2 billion four-year term loan (the 1999 Term Loan), was repaid in full during fiscal year 2003.  On December 31, 2002 we repaid $257 million of the balance of the 1999 Term Loan in advance of the first quarter of fiscal year 2004 due date.  The interest rates on the 1999 Revolver and the 1999 Term Loan are determined based on a ratings grid, which applies a margin to the prevailing LIBOR.  We do not intend to renew the 1999 Revolver upon its expiration based upon our current view that the new, unsecured 2002 Revolver of $460 million, which was undrawn as of March 31, 2003, should be sufficient to meet future needs.

Commercial Paper

During fiscal year 2003, we reduced our commercial paper (CP) program from $1 billion to $400 million.  As of March 31, 2003, there were no borrowings outstanding under the CP program.  We expect any future outstanding borrowings under the CP program will be supported by cash and marketable securities on hand and undrawn amounts available under the 2002 Revolver.

1.625% Convertible Senior Notes

We also utilize other financial markets in order to maintain our broad sources of liquidity.  In fiscal year 2003, we issued $460 million of unsecured 1.625% Convertible Senior Notes (1.625% Notes), due December 15, 2009, in a transaction pursuant to Rule 144A of the Securities Act of 1933 (Rule 144A).  The 1.625% Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness.  Concurrent with the issuance of the 1.625% Notes, we also entered into call spread repurchase option transactions (1.625% Notes Call Spread).  The entire 1.625% Notes Call Spread purchase price of $73 million was charged to Stockholders' Equity.  Under the terms of the 1.625% Notes Call Spread, we have the option to receive (i) outstanding shares equivalent to the number of shares that may be issued if all of the 1.625% Notes are converted into shares (22.954 million shares) upon payment of an exercise price of $20.04 per share (aggregate of $460 million); or (ii) a net cash settlement, net share settlement or a combination, whereby we will receive cash or shares equal to the increase in the market value of the 22.954 million shares from the aggregate value at the $20.04 exercise price (aggregate of $460 million), subject to the upper limit of $30.00 discussed below.  The 1.625% Notes Call Spread is designed to partially mitigate the potential dilution from conversion of the 1.625% Notes, depending upon the market price of our common stock at such time.  The 1.625% Notes Call Spread can be exercised during December 2009 at an exercise price of $20.04 per share.  To limit the cost of the 1.625% Notes Call Spread, an upper limit of $30.00 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 be proportionately reduced based on the amount the common share price exceeds $30.00 at the time of exercise.  We capitalized the initial transaction fees associated with the 1.625% Notes, which totaled approximately $12 million.  These fees are being amortized over the period through maturity of the 1.625% Notes in the "Interest expense, net" line item on the Consolidated Statements of Operations.

5% Convertible Senior Notes

In fiscal year 2002, we issued $660 million of unsecured 5% Convertible Senior Notes (5% Notes), due March 15, 2007, in a transaction pursuant to Rule 144A.  The 5% Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness.  The Company capitalized the initial transaction fees associated with the 5% Notes, which totaled approximately $16 million.  These fees are being amortized over the period through maturity of the 5% Notes in the "Interest expense, net" line item on the Consolidated Statements of Operations.  Concurrent with the issuance of the 5% Notes, we entered into call spread repurchase option transactions (5% Notes Call Spread).  The option purchase price of the 5% Notes Call Spread was $95 million.  The entire purchase price of $95 million was charged to Stockholders' Equity.  Under the terms of the 5% Notes Call Spread, we have the option to purchase outstanding shares equivalent to the number of shares that may be issued if all the 5% Notes are converted into shares (27.116 million shares), thereby mitigating dilution to stockholders.  The 5% Notes Call Spreads are designed to partially mitigate the potential dilution from conversion of the 5% Notes, depending upon the market price of our common stock at such time.  The 5% Notes Call Spread can be exercised at the three-year anniversary of the issuance of the 5% Notes at an exercise price of $24.83 per share.  To limit the cost of the 5% Notes 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 be proportionately reduced based on the amount the common share price exceeds $36.60 at the time of exercise.

21

Back to Index

Fiscal Year 1999 Senior Notes

In fiscal year 1999, we issued $1.750 billion of unsecured Senior Notes in a transaction pursuant to 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 fiscal year 2003, we repurchased $163 million of the 6.25% Senior Notes due April 15, 2003 at a discount.  The repurchases resulted in a total gain of approximately $3 million.  The gain was included in the "Interest expense, net" line item on the Consolidated Statements of Operations.  As of March 31, 2003, $412 million, $825 million and $350 million of our 6.25%, 6.375% and 6.5% Senior Notes, respectively, remained outstanding.  The balance of the 6.25% Senior Notes was fully repaid in April 2003.

Fiscal Year 1997 Senior Notes

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 March 31, 2003, $64 million was outstanding under the 6.77% Senior Notes.  The balance of the 6.77% Senior Notes was fully repaid in April 2003.

International Line of Credit

An unsecured and uncommitted multi-currency line of credit is available to meet short-term working capital needs for subsidiaries operating outside the United States.  This line totals $3 million, and no amount was drawn under this credit line as of March 31, 2003.

Other Matters

We pre-fund contributions to our broad-based, employee defined contribution retirement plan annually each March.  Pre-funded contributions totaled $45 million and $17 million for the years ended March 31, 2003 and 2002, respectively.

Subsequent to March 31, 2003, we received $17 million in proceeds related to the sale of fixed assets.  Since the carrying value of the fixed assets was zero, the entire amount will result in a gain to be recorded in the quarter ended June 30, 2003.

Debt ratings for our senior unsecured notes and our bank credit facilities are BBB+ and Baa2 from Standard & Poor's and Moody's Investors Service, respectively.  Our CP program is rated A-2 from Standard & Poor's and P-2 from Moody's.  Peak borrowings under all debt facilities during the fiscal year 2003 totaled approximately $3.842 billion, with a weighted-average interest rate of 5.39%.

As of March 31, 2003, the cumulative number of shares purchased under our various open market common stock repurchase programs since fiscal year 1991 was 178 million, including 8 million shares purchased in fiscal year 2003.  The remaining number of shares authorized for repurchase is approximately 22 million.

Capital resource requirements as of March 31, 2003 consisted of lease obligations for office space, equipment, mortgage or loan obligations, and amounts due as a result of product and company acquisitions. 

It is expected that existing cash, cash equivalents, marketable securities, the availability of borrowings under existing and renewable credit lines, and cash expected to be provided from operations will be sufficient to meet ongoing cash requirements.  We expect our long-standing history of providing extended payment terms to our customers to continue.

Off-Balance Sheet Arrangements

We have commitments to invest approximately $5 million in connection with joint venture agreements.  In prior fiscal years, we sold individual accounts receivable under the prior business model to an external third-party subject to certain recourse provisions.  The amounts subject to recourse approximated $141 million and $218 million as of March 31, 2003 and 2002, respectively.  Other than the commitments and indemnification described above, we do not have any other off-balance sheet arrangements with unconsolidated entities or related parties and, accordingly, off-balance sheet risks to our liquidity and capital resources from unconsolidated entities are limited.

22

Back to Index

As of March 31, 2003, we have no material capital lease obligations, either individually or in the aggregate.

Critical Accounting Policies and Business Practices

Note 1 of the Consolidated Financial Statements contains a summary of the significant accounting policies that we use.  Many of these accounting policies involve complex situations and require a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that impact our financial statements.  The following items are the critical accounting policies and business practices that are important to the portrayal of our financial condition and results of operations.

Basis of Revenue Recognition

We generate revenue from the following primary sources: (1) licensing software products, (2) providing customer technical support (hereafter referred to as maintenance), and (3) providing professional services, such as consulting and education.

We recognize revenue pursuant to the requirements of Statement of Position 97-2 "Software Revenue Recognition," (SOP 97-2)  issued by the American Institute of Certified Public Accountants as amended by SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions."  While these statements substantially govern the basis for software licensing revenue recognition, we believe that we exercise appropriate judgment in applying criteria set forth in these SOPs to record deferred subscription revenue and to recognize revenue.

In accordance with SOP 97-2, we recognize revenue from the licensing of our software products when all of the following criteria are met: (1) we have entered into a legally binding agreement with a customer; (2) we deliver the products; (3) license agreement terms are deemed fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it may not be complete and final; and (4) collection is probable.  The Company recognizes revenue evenly on a monthly basis over the term of the license.

Our software licenses generally do not include acceptance provisions.  An acceptance provision generally allows a customer to test the software for a defined period of time before they commit to licensing the software.  If a license agreement includes an acceptance provision, we do not record deferred subscription revenue or recognize revenue until the earlier of the receipt of a written customer acceptance or, if not notified by the customer to cancel the license agreement, the expiration of the acceptance period.

Beginning in October 2000, we began executing software license agreements that include flexible contractual provisions that, among other things, allow customers to receive unspecified future software products for no additional fee.  These agreements combine the right to use the software product with maintenance for the term of the agreement.  Under these agreements, we are required to recognize revenue ratably on a monthly basis over the term of the license agreement beginning upon completion of the four SOP 97-2 recognition criteria noted above.  For license agreements signed prior to October 2000, once all four of the above noted revenue recognition criteria were met, software license fees were recognized as revenue up-front and the maintenance fees were deferred and subsequently recognized as revenue over the term of the license.

23

Back to Index

Revenue recognition from professional service arrangements begins when all four of the SOP 97-2 revenue recognition criteria as discussed above are met and as the services are performed.  If it is not probable that a project will be completed or the payment will be received, revenue is deferred until the uncertainty is removed.

Revenue from sales to distributors, resellers, and VARs is generally recognized when all four of the SOP 97-2 revenue recognition criteria noted above are met and when these entities sell the software products to their customers.  This is commonly referred to as the sell-through method.

We have an established business practice of offering installment payment options to customers and have a history of successfully collecting primarily all amounts due under such agreements.  We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer.  If, in our judgment, collection of a fee is not probable, we will not recognize revenue until the uncertainty is removed, which is generally upon receipt of cash.

Our standard licensing agreements include a product warranty provision for all products.  Such warranties are accounted for in accordance with SFAS No. 5, "Accounting for Contingencies."  The likelihood that we would be required to make refunds to customers under such provisions is considered remote.

Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and damages arising from claims against such customers based on, among other things, allegations that our software product infringes the intellectual property rights of a third party.  In most cases, in the event of an infringement claim, we retain the right to (i) procure for the customer the right to continue using the software product; (ii) replace or modify the software product to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement and refund to the customer a pro-rata portion of the fees paid.  Such indemnification provisions are accounted for in accordance with SFAS No. 5.  The likelihood that we would be required to make refunds to customers under such provisions is considered remote.  The indemnification is limited to the amount paid by the customer.

Accounts Receivable

As detailed in the table included in Note 5 to the Consolidated Financial Statements as of March 31, 2003, net trade and installment accounts receivable, after accounting for unearned revenue and the allowance for doubtful accounts, were $2.373 billion.

The allowance for doubtful accounts is a valuation account used to reserve for potential impairment of accounts receivable on the balance sheet.  It reflects an accounting estimate of unidentified losses in the accounts receivable portfolio resulting from the expectations of not collecting all of these accounts receivable in full.  The valuation allowance relates to two components of receivables: (a) specifically identified receivables that are evaluated individually for impairment; and (b) all other receivables.

A specific receivable is reviewed for impairment when, based on current information and events, we do not expect to collect fully amounts due according to the contractual terms of the receivable agreement.  Factors considered in assessing collectibility include a customer's extended delinquency, requests for restructuring, and filing for bankruptcy.  A specific allowance is provided based on the difference between the carrying value of the receivable and the estimated amounts to be collected.

24

Back to Index

Deferred Tax Assets

When we prepare our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  We record this amount as a provision for our taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."  This process requires us to estimate our actual current tax liability in each jurisdiction,  estimate differences resulting from differing treatment of items for financial statement purposes versus tax return purposes (known as "temporary differences"), which result in deferred tax assets and liabilities, and assess the likelihood that our deferred tax assets will be recovered from future taxable income.  If we believe that recovery is not likely, we establish a valuation allowance.  We have recognized as a deferred tax asset, a portion of the tax benefits connected with losses related to operations, which are expected to result in a future tax benefit.  As of March 31, 2003, the current and noncurrent deferred tax assets, net of a valuation allowance, totaled $78 million and $29 million, respectively, and have been offset against the respective deferred tax liabilities.  This recognition assumes we will be able to generate sufficient future taxable income so that the carryforward of these losses will be realized.  The factors that we consider 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 expenses, such as duplicate facility costs, employee severance and other costs, foreign net operating losses (NOLs), and the recognition of subscription revenue pursuant to our Business Model.  The NOLs generally expire between 2004 and 2014.  An additional valuation allowance of $17 million was established in fiscal year 2003 for certain foreign deferred tax assets we believe might not be realized.  Future results may vary from these estimates.  At this time it is not practicable to determine if we will need to increase the valuation allowance or if such future valuations will have a material impact on our financial statements.

Goodwill, Capitalized Software Products, and Other Intangible Assets

We account for goodwill under SFAS No. 142, "Goodwill and Other Intangible Assets."  This statement requires an impairment-only approach to accounting for goodwill.  As a result of various acquisitions completed under the purchase method, goodwill constitutes a significant portion of our total assets. 

The SFAS No. 142 goodwill impairment model is a two-step process.  The first step is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill.  If the fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.  The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.  That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions.  These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge.  Estimates of fair value are primarily determined using discounted cash flows and are based on our best estimate of future revenue and operating costs and general market conditions.  These estimates are subject to review and approval by senior management.  This approach uses significant assumptions, including projected future cash flows (including timing), the discount rate reflecting the risk inherent in future cash flows, and a terminal growth rate.

25

Back to Index

The carrying value of capitalized software products, both purchased software and internally developed software, and other intangible assets, are reviewed on a regular basis for the existence of internal and external facts or circumstances that may suggest impairment.  Such facts and circumstances considered include 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.  It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude thereof.

New Accounting Pronouncements

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 pronouncement is effective for us beginning April 1, 2003.  This pronouncement will not have a material impact on the Company upon adoption.

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.  We adopted SFAS No. 145 effective July 1, 2002.  As a result, we recorded a $3 million gain in fiscal year 2003 from the early retirement of a portion of our debt which was included in the "Interest expense, net" line item on the Consolidated 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.  We have not entered into any significant exit or disposal activities since the effective date of this statement.  As such, SFAS No. 146 has not had an impact on the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."  Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee.  The recognition requirement was effective for guarantees issued or modified after December 31, 2002.  We adopted Interpretation No. 45 effective December 2002 and the applicable disclosures have been made.

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."  Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets.  The provisions of Issue 00-21 will apply to revenue arrangements entered into in fiscal year periods beginning after June 15, 2003 that are not within the scope of higher level accounting literature, including SOP 97-2.  We do not believe that the adoption of Issue 00-21 will have a material impact on the Company.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."  SFAS No. 148 amends certain provisions of SFAS No. 123 and is effective for financial statements for fiscal years ending after December 15, 2002.  Beginning in fiscal year 2004, we will adopt the fair value based method of recording stock options outlined in SFAS No. 123.  Under the fair value based method, we will charge to expense the computed value of all newly granted stock options over the vesting period based on the options' fair value at the date of grant.

26

Back to Index

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities."  Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date.  This Interpretation is applicable for us in the second quarter of fiscal year 2004, which ends September 30, 2003, for interests acquired in variable interest entities prior to February 1, 2003.  This Interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain, specified characteristics.  The adoption of this Interpretation for variable interest entities created after January 31, 2003 did not have a material impact on the Company.  We are continuing to review the provisions of this Interpretation to determine its impact, if any, on future reporting periods with respect to interests in variable interest entities created prior to February 1, 2003, but we do not currently anticipate any material accounting or disclosure requirements under the provisions of this Interpretation.

Risk Factors

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

Operating results and revenue are subject to fluctuations caused by many factors.

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

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

The success of our international operations is subject to many factors.

International revenue has historically represented approximately 40% of our total worldwide revenue.  Continued success in selling our products outside of the United States will depend on a variety of factors, including:

Back to Index

Our products must remain compatible with ever-changing operating environments.

IBM, HP, Sun Microsystems, and Microsoft are the largest suppliers of systems and computing software and, in most cases, are the manufacturers of the computer hardware systems used by most of our 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 that perform functions currently performed by our products or could require substantial modification of our products to maintain compatibility with these companies' hardware or software.  Although we have to date been able to adapt our products and our business to changes introduced by hardware manufacturers and system software developers, there can be no assurance that we will be able to do so in the future.  Failure to adapt our products in a timely manner to such changes or customer decisions to forego the use of our products in favor of those with comparable functionality contained either in the hardware or operating system could have a material adverse effect on our business, financial condition, operating results, and cash flow.

The computer software business is highly competitive.

The market in which we compete is marked by rapid and substantial technological change, the steady emergence of new companies and products, evolving industry standards, and changing customer needs.  We compete with many established companies in the markets we serve, and some of these companies may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers, and greater opportunity to address customers' various information technology requirements than us.  We also compete with many smaller, less established companies that may be able to focus more effectively on specific product segments or markets.  Historically, we have competed primarily on the basis of our products' features and performance.  As product pricing becomes a more important criterion for our customers, we may experience increased competition from certain, low-price competitors.  To remain competitive, we must develop new products and continue to enhance existing products.  We may be unsuccessful in our ability to develop new releases or new products that meet the needs of our 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.  Our 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 our business, financial condition, operating results, and cash flow.

Certain software is licensed from third parties.

Some of our products contain software licensed from third parties.  Some of these licenses may not be available to us in the future on terms that are acceptable or allow our 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 our business, financial condition, operating results, and cash flow.

Failure to protect our intellectual property rights would weaken our competitive position.

Our future success is dependent upon our proprietary technology.  We protect our proprietary information through the use of patent, copyright, trademark, trade secret laws, confidentiality procedures, and contractual provisions.  Notwithstanding our efforts to protect our proprietary rights, policing unauthorized use or copying of our 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 our 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 we operate.  In addition, patents we have obtained may be circumvented, challenged, invalidated, or designed around by other companies.  Our inability to adequately protect our intellectual property for these or other reasons could adversely affect our business, financial condition, operating results, and cash flow.

Customers are still adapting to our Business Model.

Our Business Model affords customers greater flexibility in licensing transactions.  For example, under the Business Model, we offer software licenses on a month-to-month or other short-term basis in order to allow customers the opportunity to try our software products without committing to a multi-year license obligation.  Transactions such as these increase the risk that customers will not fully implement our software and will not enter into a long-term relationship with us.  This effect could be diminished if customers elect cost certainty by committing to longer license agreement periods.  Additionally, customer preference for payment (upfront, annual or monthly installments) could impact the amount of cash generated from operations in any period.  This could adversely affect our business, financial condition, operating results, and cash flow. 

28

Back to Index

We may become dependent upon large transactions.

We have historically been dependent upon large-dollar enterprise transactions with individual customers.  As a result of the flexibility afforded by our Business Model, we anticipate that there will be fewer of these transactions in the future.  There can be no assurances, however, that we will not be reliant on large-dollar enterprise transactions in the future, and the failure to close such transactions could adversely affect our business, financial conditions, operating results, and cash flow.

Growth depends upon successful integration of acquisitions.

Our 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 our management team, internal systems, and financial resources.  Difficulties encountered in successfully integrating acquired companies and products may adversely affect our business, financial condition, operating results, and cash flow.

We could be subject to fines, penalties, or other sanctions as a result of a joint inquiry by the SEC and U.S. Attorney's Office.

As previously reported, we have been cooperating with an ongoing joint inquiry being conducted by the staff of the Northeast Regional Office of the Securities and Exchange Commission and the United States Attorney's Office for the Eastern District of New York concerning certain of our accounting practices.  See Item 3. "Legal Proceedings."  Although we are unable at this point to predict the scope or outcome of this inquiry, it is possible that it could result in the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, suspensions or disbarments from government contracts, and/or other remedies and sanctions.  The conduct of these proceedings could negatively impact our stock price.  In addition, we expect to continue to incur expenses associated with responding to these agencies, regardless of the outcome, and this may divert the efforts and attention of our management team from normal business operations.

Our credit ratings could be downgraded.

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

Customer decisions are influenced by general economic conditions.

Our products are designed to improve the productivity and efficiency of our customers' information processing resources.  In a recessionary environment, our 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 forgo decisions to license new products or upgrades to their existing environments and this could adversely affect our business, financial condition, operating results, and cash flow.

29

Back to Index

Back to Index

Acts of terrorism or war may adversely affect our business.

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

Our stock price may continue to be volatile.

Our stock price is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant license agreements, changes in earnings estimates by analysts, announcements of technological innovations or new products by us or our 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 that are similar or related to those in which we operate 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 our common stock.

Potential European Union tariffs or United States Congressional action in connection with the extraterritorial income case could adversely affect our business.

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.  We cannot be certain, however, what impact the potential EU tariffs could have on the software industry or the economy in general.  Additionally, we cannot be certain that any legislation replacing the extraterritorial income regime will continue to provide us with the level of tax incentives received under the existing regime.  We currently save approximately $12 million per year in United States federal income tax under the current extraterritorial income regime.

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk

Back to Index

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions

32

Back to Index

Item 14. Controls and Procedures

Evaluation of disclosure controls and procedures

Within 90 days prior to the date of this report (the Evaluation Date), the Company's Chairman and Chief Executive Officer and its 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.

Changes in internal controls

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

Item 15. Accountants' Fees and Services

Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning accountants' fees and services, which information is incorporated herein by reference.

33

Back to Index

PART IV

Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

34

Back to Index

35

Back to Index

* Management contract or compensatory plan or arrangement.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

37

Back to Index

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

38

Back to Index

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

39

Back to Index

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Computer Associates International, Inc. and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2003.  Our audits also included the financial statement schedule as of and for the years ended March 31, 2003, 2002 and 2001 listed in the Index at Item 16(d).  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 auditing standards generally accepted in the United States of America.  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 Computer Associates International, Inc. and subsidiaries as of March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America.  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.

As discussed in Note 1 to the consolidated financial statements, effective April 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

KPMG LLP

New York, New York
May 9, 2003

42

Back to Index

44

Back to Index