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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 0-12771

Science Applications

Registrant’s telephone number, including area code:

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

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

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

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

      As of March 31, 2002, the aggregate market value of the voting stock held by non-affiliates of Registrant was $3,792,003,829. For the purpose of this calculation, it is assumed that the Registrant’s affiliates include the Registrant’s Board of Directors and certain of the employee benefit plans of the Registrant and its subsidiaries. The Registrant disclaims the existence of any control relationship between it and such employee benefit plans.

      As of March 31, 2002, there were 202,282,457 shares of Registrant’s Class A Common Stock and 266,411 shares of Registrant’s Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of Registrant’s definitive Proxy Statement for its 2002 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K Report.

Table of Contents

PART I

Item 1.     Business

The Company

      We provide diversified professional and technical services involving the application of scientific expertise to solve complex technical problems for government and commercial customers in the U.S. and abroad. These services frequently involve computer and systems technology.

      Our technical services consist of basic and applied research services; design and development of computer software; systems integration; systems engineering; technical operational and management support services; environmental engineering; design and integration of network systems; technical engineering and consulting support services; and development of systems, policies, concepts and programs. Our high-technology products, which we design and develop, include customized and standard hardware and software, such as automatic equipment identification technology, sensors, nondestructive imaging and security instruments.

      Through one of our subsidiaries, Telcordia Technologies, Inc., which we call “Telcordia,” we are a global provider of software, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry.

      We provide technical services in our key vertical market areas of “National Security,” “Health Care,” “Environment,” “Energy,” “Telecommunications,” “Information Technology” and a group of general market categories called “Other,” which includes our transportation, logistics, space and utilities business areas and information technology support to federal civil agencies.

      Our operating groups, which we call “Groups” are divided into three segments, Regulated, Non-Regulated Telecommunications and Non-Regulated Other, depending on the nature of the customers, the contractual requirements and the regulatory environment governing our services. While the Regulated, Non-Regulated Telecommunications and Non-Regulated Other segments represent the management approach for making decisions and assessing performance, our decentralized marketing approach focuses on our key vertical markets. Marketing decisions based on vertical markets are typically made at the lowest operational level.

      Groups in the Regulated segment provide technical services and products through contractual arrangements as either a prime contractor or a subcontractor to other contractors, primarily for departments and agencies of the U.S. Government, including the Department of Defense, Department of Energy, Department of Health and Human Services, Department of Justice, Department of Transportation, Department of Treasury, Department of Veterans Affairs, Environmental Protection Agency and National Aeronautics and Space Administration. Operations in the Regulated segment are subject to specific regulatory accounting and contracting guidelines such as Cost Accounting Standards and Federal Acquisition Regulations. The Regulated segment includes business from all of our vertical market areas. The percentage of our revenues attributable to the Regulated segment for fiscal years 2002, 2001 and 2000 were 64%, 62% and 59%, respectively.

      Groups in the Non-Regulated Telecommunications and the Non-Regulated Other segments provide technical services and products primarily to customers in commercial markets. Generally, operations in the Non-Regulated Telecommunications and the Non-Regulated Other segments are not subject to specific regulatory accounting or contracting guidelines.

      Groups in the Non-Regulated Telecommunications segment are primarily involved in the telecommunications business area. For 2002, 2001 and 2000, our Telcordia subsidiary made up the Non-Regulated Telecommunications segment. The percentage of our revenues attributable to the Non-Regulated Telecommunications segment for fiscal years 2002, 2001 and 2000 were 24%, 27% and 25%, respectively.

      The Non-Regulated Other segment includes business from all of our vertical market areas except for National Security and Space (which is part of the “Other” vertical market). The percentage of our revenues attributable to the Non-Regulated Other segment for fiscal years 2002, 2001 and 2000 were 13%, 11% and

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      We hold and manage substantially all of our equity investment interests in publicly traded and private emerging technology companies in our wholly-owned subsidiaries, SAIC Venture Capital Corporation, which we call “SAIC Venture Capital” and Telcordia Venture Capital Corporation. In February 2000, SAIC Venture Capital sold shares of Network Solutions, Inc., which we call “NSI,” in a secondary public offering, reducing its ownership interest in NSI from 44.7% to 22.6%. NSI provides Internet domain name registration services and Intranet consulting and network design and implementation services. In June 2000, NSI merged and became a wholly-owned subsidiary of VeriSign, Inc., a publicly traded company and leading provider of Internet trust services, which we call “VeriSign.” On the effective date of the merger, we held approximately 9% of VeriSign’s outstanding shares. We subsequently sold shares of VeriSign and at the end of fiscal 2002, we held approximately 5% of VeriSign’s outstanding shares. We have equity collars in place for a majority of these equity securities in order to mitigate the risk of price fluctuations. Through fiscal year 2000, NSI was a consolidated subsidiary. Beginning in fiscal 2001, NSI was no longer consolidated in our operating results.

      We hold 60% of the common stock of a joint venture, Informática, Negocios y Tecnología, S.A., which we call “INTESA,” which was formed with Venezuela’s national oil company, Petróleos de Venezuela, S.A., which we call “PDVSA.” INTESA provides information technology services in Latin America, with its principal customer being PDVSA. We own 55% of AMSEC LLC, a joint venture that provides maintenance engineering and technical support services to the U.S. Navy and marine industry customers.

      We were originally incorporated as a California corporation in 1969 and re-incorporated as a Delaware corporation in 1984. Our principal office and corporate headquarters are located in San Diego, California at 10260 Campus Point Drive, San Diego, California 92121 and our telephone number is (858) 826-6000. All references to “we,” “us,” or “our” include, unless the context indicates otherwise, our predecessor and subsidiary corporations.

      We provide technical services to our customers in the vertical market areas listed below. Technical services are sold to government and commercial customers in the Regulated, Non-Regulated Telecommunications and Non-Regulated Other segments. Technical services in the National Security and Space vertical markets are provided to government customers and reported primarily in the Regulated segment.

      We provide a wide array of national security-related technical services to our government customers primarily in the Regulated segment. These services include advanced research and technology development, systems engineering and systems integration and technical, operational and management support services. We also provide certain high-technology products, including sensors, nondestructive imaging and security instruments.

      We provide health-related technical services, including medical information systems, technology development and research support services.

      We perform site assessments, remedial investigations and feasibility studies, remedial actions, technology evaluations, sampling, monitoring and regulatory compliance support and training in the environmental area.

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      We provide energy-related technical services, including safety evaluations, security, reliability and availability engineering evaluations, technical reviews, quality assurance, information systems, plant monitoring systems and project management.

      In the telecommunications area, we provide interoperable network design and implementation, new software and enhancements of existing software for network management and operation, consulting and engineering services and telecommunications software.

      Our information technology-related technical services include information technology outsourcing services, information protection and electronic business security services, intranet consulting, outsourcing and network design services.

      We provide technical services in transportation, space, and security systems management, including advanced traffic and intermodal freight management, material control and computer and information security, engineering support for NASA’s Space Shuttle and Space Station programs, and undersea data collection, transmission and analysis systems and services. We also provide technical services to law enforcement agencies and educational organizations.

Resources

      The technical services and products that we provide to government and commercial customers in the Regulated, Non-Regulated Telecommunications and Non-Regulated Other segments utilize a wide variety of resources. We can obtain a substantial portion of the computers and other equipment, materials and subcontracted work that we require from more than one supplier. However, with respect to certain products and programs, we depend on a particular source or vendor. While a temporary or permanent disruption in the supply of these materials or services could cause inconvenience or delay or impact the profitability of any affected program or product, we believe it would not have a material adverse effect on our financial condition or operations as a whole.

      The availability of skilled employees who have the necessary education and/or experience in specialized scientific and technological disciplines remains critical to our future growth and profitability. Because of our growth and the competition for experienced personnel, it has become more difficult to meet all of our needs for these employees in a timely manner. However, these difficulties have not had a significant impact on us to date. We intend to continue to devote significant resources to recruit and retain qualified employees. We also maintain a variety of benefit programs for our employees, including retirement and bonus plans, group life, health, accident and disability insurance as well as the opportunity to participate in employee ownership. See “Business — Employees and Consultants” and “Market for Registrant’s Common Equity and Related Stockholder Matters — The Limited Market.”

Marketing

      Our marketing activities in the Regulated, Non-Regulated Telecommunications and Non-Regulated Other segments are focused on key vertical markets and are primarily conducted by our own professional staff of engineers, scientists, analysts and other personnel. Our marketing approach for our technical services begins with the development of information concerning the requirements of our government, commercial and other potential customers for the types of technical services that we provide. This information is gathered in the course of contract performance, reviewing requests for competitive bids, formal briefings, participation in professional organizations and published literature. This information is then evaluated and exchanged among

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Competition

      Our business is highly competitive, particularly in the business areas of telecommunications and information technology outsourcing in both the Non-Regulated Telecommunications and the Non-Regulated Other segments. We have a large number of competitors, some of which have been established longer and have substantially greater financial resources and larger technical staffs. We also compete with smaller, more specialized entities that are able to concentrate their resources on particular areas. In the Regulated segment, we also compete with the U.S. Government’s own in-house capabilities and federal non-profit contract research centers.

      We compete on the basis of technical expertise, management and marketing abilities and price. Our continued success is dependent upon our ability to hire and retain highly qualified scientists, engineers, technicians, management and professional personnel who will provide superior service and performance on a cost-effective basis.

Significant Customers

      During fiscal years 2002, 2001 and 2000, approximately 88%, 86% and 87%, respectively, of the revenues in the Regulated segment were attributable to prime contracts directly with a number of departments and agencies of the U.S. Government or to subcontracts with other contractors engaged in work for the U.S. Government. No single U.S. Government department or agency accounted for 10% or more of consolidated revenues in fiscal years 2002, 2001 and 2000.

      Telcordia historically has derived a majority of its revenues from the regional Bell operating companies, which we call “RBOCs.” The percentage of the revenues in the Non-Regulated Telecommunications segment from the RBOCs was 65% in fiscal year 2002, 62% in fiscal year 2001, and 53% in fiscal year 2000.

      During fiscal years 2002, 2001 and 2000, approximately 43%, 46% and 40%, respectively, of the revenues in the Non-Regulated Other segment were attributable to PDVSA, our partner in our INTESA joint venture. The outsourcing contract with PDVSA expires on June 30, 2002. It is uncertain whether PDVSA will renew the contract, recompete the work or take other action regarding the contract.

Government Contracts

      The U.S. Government is our primary customer in the Regulated segment. Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years; however, such programs are normally funded on an annual basis. All U.S. Government contracts and subcontracts may be modified, curtailed or terminated at the convenience of the government if program requirements or budgetary constraints change. If a contract is terminated for convenience, we are generally reimbursed for our allowable costs through the date of termination and are paid a proportionate amount of the stipulated profit or fee attributable to the work actually performed. Although contract and program modifications, curtailments or terminations have not had a material adverse effect on us in the past, no assurance can be given that such modifications, curtailments or terminations will not have a material adverse effect on our financial condition or results of operations in the future.

      In addition, the U.S. Government may terminate a contract for default. Although the U.S. Government has never terminated any of our contracts for default, such a termination could have a signification impact on our business. If a contract is terminated for default, we may be unable to recover amounts billed or billable under the contract and may be liable for other costs and damages.

      Contract costs for services or products supplied to the U.S. Government, including allocated indirect costs, are subject to audit and adjustments as a result of negotiations between U.S. Government

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Contract Type

      Our business with the U.S. Government and other customers is generally performed under cost-reimbursement, target cost and fee with risk sharing, time-and-materials, fixed-price level-of-effort or firm fixed-price contracts. Under cost-reimbursement contracts, the customers reimburse us for our direct costs and allocable indirect costs, plus a fixed fee or incentive fee. Under target cost and fee with risk sharing contracts, the customers reimburse our costs plus a specified or target fee or profit, if our actual costs equal a negotiated target cost. If actual costs fall below the target cost, we receive a portion of the cost underrun as additional fee or profit. If actual costs exceed the target cost, our target fee and cost reimbursement are reduced by a portion of the overrun. Under time-and-materials contracts, we are paid for labor hours at negotiated, fixed hourly rates and reimbursed for other allowable direct costs at actual costs plus allocable indirect costs. Under fixed-price level-of-effort contracts, the customer pays us for the actual labor hours provided to the customer at negotiated hourly rates up to a fixed ceiling. Under firm fixed-price contracts, we are required to provide stipulated products or services for a fixed price. Because we assume the risk of performing a firm fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during contract performance could result, and in some instances has resulted, in reduced profits or losses for particular contracts.

      During fiscal years 2002, 2001 and 2000, approximately 51%, 51% and 55%, respectively, of the Regulated segment revenues were derived from cost-reimbursement contracts and approximately 16%, 15% and 14%, respectively, of the Regulated segment revenues were from firm fixed-price contracts, with the balance from time-and-materials and fixed-price level-of-effort contracts.

      During fiscal years 2002, 2001 and 2000, approximately 82%, 80% and 85%, respectively, of the Non-Regulated Telecommunications segment revenues were from firm fixed-price contracts and approximately 17%, 19% and 13%, respectively, of the Non-Regulated Telecommunications segment revenues were derived from time-and-materials and fixed-price level-of-effort contracts, with the balance from cost-reimbursement contracts.

      During fiscal years 2002, 2001 and 2000, approximately 50%, 46% and 26%, respectively, of the Non-Regulated Other segment revenues were derived from target cost and fee with risk sharing contracts and approximately 44%, 39% and 28%, respectively, of the Non-Regulated Other segment revenues were from time-and-materials and fixed-price level-of-effort contracts, with the balance from firm fixed-price and cost-reimbursement contracts.

      Any costs that we incur prior to the execution of a contract or contract amendment are incurred at our risk, and it is possible that the customer will not reimburse us for these pre-contract costs. Pre-contract costs at January 31, 2002 and 2001 were $44,299,000 and $27,141,000, respectively, for the Regulated segment; $446,000 and $2,580,000, respectively, for the Non-Regulated Telecommunications segment; and $627,000 and $806,000, respectively, for the Non-Regulated Other segment. We expect to recover substantially all of these costs; however, no assurance can be given that the contracts or contract amendments will be executed or that we will recover the related costs.

Patents and Proprietary Information

      Other than with respect to Telcordia, our technical services and products are not generally dependent upon patent protection. We claim a proprietary interest in certain of our products, software programs, methodology and know-how. This proprietary information is protected by copyrights, trade secrets, licenses, contracts and other means.

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      In the Non-Regulated Telecommunications segment, Telcordia’s patent portfolio consists of more than 900 U.S. and foreign patents. More than 200 of these patents have been licensed to organizations worldwide. Telcordia has been granted patents across a wide range of disciplines, including telecommunications transmission, services and operations, optical networking, switching, wireless communications, protocols, architecture and coding. Along with Telcordia, we actively pursue opportunities to license our technologies to third parties and evaluate potential spin-offs of our technologies.

      In connection with the performance of services for customers in the Regulated segment, the U.S. Government has certain rights to data, computer codes and related material that we develop under U.S. Government-funded contracts and subcontracts. Generally, the U.S. Government may disclose such information to third parties, including, in some instances, competitors. In the case of subcontracts, the prime contractor may also have certain rights to the programs and products that we develop under the subcontract.

Backlog

      Backlog includes only the funded dollar amount of contracts in process and does not include the dollar amount of projects for which we have been given permission by the customer (i) to begin work but for which a formal contract has not yet been entered into or (ii) to extend work under an existing contract prior to the formal amendment or modification of the existing contract. In these cases, either contract negotiations have not been completed or a contract or contract amendment has not been executed. When a contract or contract amendment is executed, the backlog will be increased by the difference between the dollar value of the contract or contract amendment and the revenue recognized to date.

      The backlog at January 31, 2002 and 2001 for the Regulated segment was approximately $1,960,000,000 and $1,991,000,000, respectively, for the Non-Regulated Telecommunications segment it was approximately $1,861,000,000 and $2,313,000,000, respectively, and for the Non-Regulated Other segment it was approximately $535,000,000 and $305,000,000, respectively. We expect that a substantial portion of our backlog at January 31, 2002 will be recognized as revenues prior to January 31, 2003. Some contracts associated with the backlog are incrementally funded and may continue for more than one year.

Employees and Consultants

      As of February 1, 2002, we employed approximately 40,400 full and part time employees. We also use consultants to provide specialized technical and other services on specific projects. To date, we have not experienced any strikes or work stoppages and we consider our relations with our employees to be good.

      The highly technical and complex services and products provided by us are dependent upon the availability of professional, administrative and technical personnel having high levels of training and skills. Because of our growth and competition for experienced personnel, it has become more difficult to meet all of our needs for these employees in a timely manner. However, such difficulties have not had a significant impact on us to date. We intend to continue to devote significant resources to recruit and retain qualified employees. Management believes that our employee ownership programs and philosophy are major factors in our ability to attract and retain qualified personnel.

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RISK FACTORS

      You should carefully consider the risks and uncertainties described below in your evaluation of our business and us. These are not the only risks and uncertainties that we face. If any of these risks or uncertainties actually occur, our business, financial condition or operating results could be materially harmed and the price of our common stock could decline.

Risks Relating to Our Business

      We derive a substantial portion of our revenues from the U.S. Government as a prime contractor or a subcontractor. The percentage of total revenues from the U.S. Government was 58% in fiscal year 2002, 54% in fiscal year 2001 and 52% in fiscal year 2000. Our revenues could be adversely impacted by a reduction in the overall level of U.S. Government spending and by changes in its spending priorities from year to year. Furthermore, even if the overall level of U.S. Government spending does increase or remains stable, the budgets of the government agencies with whom we do business may be decreased or our projects with them may not be sufficiently funded, particularly because Congress usually appropriates funds for a given project on a fiscal-year basis even though contract performance may take more than one year. In addition, obtaining U.S. Government contracts remains a highly competitive process and this has led to a greater portion of our revenue base being associated with contracts providing for a lower amount of reimbursable cost than we have traditionally been able to recover.

      Telcordia historically has derived a majority of its revenues from the RBOCs. The percentage of total Telcordia revenues from the RBOCs was 65% in fiscal year 2002, 62% in fiscal year 2001 and 53% in fiscal year 2000. With the recent downturn in the telecommunications industry, Telcordia’s business is more dependent on its business from the RBOCs and it is attempting to diversify its business by obtaining new customers. A continued downturn in the telecommunications industry and loss of business from the RBOCs could further reduce revenues and have an adverse impact on our business.

      We have made progress in our efforts to diversify our business across a greater number of customers. However, we still remain heavily dependent upon the U.S. Government as our primary customer and the RBOCs as a major source of Telcordia’s revenues. Our future success and revenue growth will depend in part upon our ability to continue to expand our customer base.

      We plan for our revenues from customers outside the U.S. to continue to increase in the future. Consequently, we are increasingly subject to the risks of conducting business internationally. These risks include:

	•	unexpected changes in regulatory requirements
	•	tariffs
	•	political and economic instability
	•	unfamiliar and unknown business practices and customs
	•	restrictive trade policies
	•	inconsistent product regulation
	•	cost of complying with a variety of laws
	•	licensing requirements

      We do not know the impact that such regulatory, geopolitical and other factors may have on our business in the future. These risks may be significant for entities such as INTESA, a Venezuelan joint venture in which

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      We have transactions denominated in foreign currencies because some of our business is conducted outside of the United States. In addition, our foreign subsidiaries generally conduct business in foreign currencies. We are exposed to fluctuations in exchange rates, which could result in losses and have a significant impact on our results of operations. Our risks include the possibility of significant changes in exchange rates and the imposition or modification of foreign exchange controls by either the U.S. or applicable foreign governments. We have no control over the factors that generally affect these risks, such as economic, financial and political events and the supply and demand for the applicable currencies. We may use forward foreign currency exchange rate contracts to hedge against movements in exchange rates for contracts denominated in foreign currencies. We cannot assure you that a significant fluctuation in exchange rates will not have a significant negative impact on our results of operations.

      Our success to date has resulted in part from the significant contributions of our executive officers, in particular those of our founder and chief executive officer, J.R. Beyster (age 77). Dr. Beyster has been our only chief executive officer and chairman of the board since he founded the company in 1969. He also currently serves as our president. Dr. Beyster plays a key role in many aspects of our business, including marketing, operations and management. Dr. Beyster and our other executive officers are expected to continue to make important contributions to our success. The loss of Dr. Beyster or any of the other key personnel could materially affect our operations. We generally do not have long-term employment contracts with these key personnel nor do we maintain “key person” life insurance policies.

      In March 2001, our Telcordia subsidiary filed a Demand for Arbitration with the International Chamber of Commerce in Paris, France initiating arbitration and seeking damages of approximately $130 million from Telkom South Africa related to a contract dispute. Telcordia contends that Telkom South Africa had breached the contract for, among other things, taking and using Telcordia software without paying for it, improperly refusing to accept software deliveries, failing to cooperate in defining future software releases, and failing to make other payments due under the contract. In May 2001, Telkom South Africa filed with the International Chamber of Commerce its Answer to Telcordia’s Demand for Arbitration and its Counterclaims against Telcordia.

      Telkom South Africa contends that Telcordia breached the contract for, among other things, failing to provide deliverables compliant with the requirements of the contract at the times provided in the contract. Telkom South Africa also contends that Telcordia misrepresented its capabilities and the benefits that Telkom South Africa would receive under the contract. Telkom South Africa seeks substantial damages from Telcordia, including repayment of approximately $97 million previously paid to Telcordia under the contract and the excess costs of reprocuring a replacement system, estimated by Telkom South Africa to be $234 million. Telkom South Africa’s Counterclaim contains additional claims which have not been quantified by Telkom South Africa. The parties have engaged in substantial discovery. On March 8, 2002, Telkom South Africa filed a notice of intention to amend its Answer and Counterclaim. The arbitrator has scheduled a preliminary hearing on April 10, 2002 to address the issues raised by Telkom South Africa’s filing. Telcordia disputes Telkom South Africa’s contentions and intends to vigorously defend against these claims while pursuing its own claims in the arbitration.

      The arbitration hearing to determine the merit of both parties’ substantive claims is currently scheduled to commence in May 2002 in Johannesburg, South Africa. Following this hearing, on a date to be established, the arbitrator will determine the damages to be awarded, if necessary. Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcome of this arbitration is not

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      The Government may modify, curtail or terminate our contracts. Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years; however, these programs are normally funded on an annual basis. The U.S. Government may modify, curtail or terminate its contracts and subcontracts at its convenience. Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our results of operations and financial condition.

      Our business is subject to potential Government inquiries and investigations. We are from time to time subject to certain U.S. Government inquiries and investigations of our business practices due to our participation in government contracts. We cannot assure you that any such inquiry or investigation would not have a material adverse effect on our results of operations and financial condition.

      Our contract costs are subject to audits by Government agencies. The costs we incur on our U.S. Government contracts, including allocated indirect costs, may be audited by U.S. Government representatives. These audits may result in adjustments to our contract costs. We normally negotiate with the U.S. Government representatives before settling on final adjustments to our contract costs. Substantially all of our indirect contract costs have been agreed upon through fiscal year 2000 and are not subject to further adjustment. We have recorded contract revenues in fiscal years 2001 and 2002 based upon costs we expect to realize upon final audit. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenues or profits upon completion and final negotiation of these audits.

      The percentage of our Regulated segment revenues from firm fixed-price contracts was 16% for fiscal year 2002, 15% for fiscal year 2001 and 14% for fiscal year 2000. The percentage of our Non-Regulated Telecommunications segment revenues from firm fixed-price contracts was 82% for fiscal year 2002, 80% for fiscal year 2001 and 85% for fiscal year 2000. Because we assume the risk of performing a firm fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for such contracts.

      Many of our customers in the information technology outsourcing business contract on the basis of target cost and fee with risk sharing. During fiscal years 2002, 2001 and 2000, approximately 50%, 46% and 26%, respectively, of the Non-Regulated Other segment revenues were derived from target cost and fee with risk sharing contracts. Under target cost and fee with risk sharing contracts, the customers reimburse our costs plus a specified or target fee or profit; however, if our actual costs exceed the target cost, our target fee and cost reimbursement are reduced by a portion of the overrun. Failure to control costs during performance of the work could result in reduced profits for such contracts.

      Any costs we incur before the execution of a contract or contract amendment are incurred at our risk, and it is possible that the customer will not reimburse us for these pre-contract costs. At January 31, 2002, we had pre-contract costs of $44,299,000 in the Regulated segment, $446,000 in the Non-Regulated Telecommunications segment and $627,000 in the Non-Regulated Other segment. We cannot assure you that contracts or contract amendments will be executed or that we will recover the related costs.

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      We have historically supplemented our internal growth through acquisitions, investments or joint ventures. We evaluate potential acquisitions, investments and joint ventures on an ongoing basis. Our acquisition and investment strategy poses many risks, including:

	•	We may not be able to compete successfully for available acquisition candidates, complete future acquisitions and investments or accurately estimate their financial effect on our business
	•	Future acquisitions, investments and joint ventures may require us to issue additional common stock, spend significant cash amounts or decrease our operating income
	•	We may have trouble integrating the acquired business and retaining its personnel
	•	Acquisitions, investments or joint ventures may disrupt our business and distract our management from other responsibilities
	•	If our acquisitions or investments fail, our business could be harmed

      Our business, financial condition and results of operations may be affected by various economic factors. Unfavorable economic conditions may make it more difficult for us to maintain and continue our revenue growth. In an economic recession or under other adverse economic conditions, customers and vendors may be more likely to be unable to meet contractual terms or their payment obligations. A decline in economic conditions may have a material adverse effect on our business.

Risks Relating to Our Industry

      The availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Because of our growth and competition for experienced personnel, particularly in highly specialized areas, it has become more difficult to meet all of our needs for these employees in a timely manner. We intend to continue to devote significant resources to recruit, train and retain qualified employees; however, we cannot assure you that we will be able to attract and retain such employees on acceptable terms. Any failure to do so could have a material adverse effect on our operations.

      Our business is highly competitive, particularly in the business areas of telecommunications and information technology outsourcing in both our Non-Regulated Telecommunications and our Non-Regulated Other segments. We compete with larger companies that have greater financial resources and larger technical staffs. We also compete with smaller, more specialized entities who are able to concentrate their resources on particular areas. In the Regulated segment, we also compete with the U.S. Government’s own in-house capabilities and federal non-profit contract research centers. To continue our success, we must provide superior service and performance on a cost-effective basis to our customers.

Risks Relating to Our Stock

      There is no public market for the Class A common stock. The limited market maintained by our wholly-owned broker-dealer subsidiary, Bull, Inc., permits existing stockholders to offer our stock for sale only on predetermined trade dates and only at the price determined by the board of directors. Generally, there are four trade dates each year, however, a scheduled trade date could be postponed or cancelled. Also, if there are

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      Our certificate of incorporation limits our stockholders’ ability to sell or transfer shares of Class A common stock in some circumstances. These restrictions include:

	•	our right of first refusal to purchase shares a stockholder offers to sell to a third party other than in our limited market
	•	our right to repurchase shares upon the termination of a stockholder’s employment or affiliation with us

      Employees who qualify for our Alumni Program can elect to have us defer our repurchase rights for five years.

      Our stock price is not determined by a trading market of bargaining buyers and sellers. Our board of directors, most of whom are stockholders, determines the price at which the Class A common stock trades by using the valuation process that includes input from an independent appraiser and a stock price formula as described under “Price Range of Class A Common Stock and Class B Common Stock.” All trades in the limited market will occur at the stock price determined by the board of directors. Our board of directors believes the stock price represents a fair market value; however, we cannot assure you that the stock price represents the value that would be obtained if our stock was publicly traded. The formula referred to on page 18, which is one part of the valuation process, does not specifically include variables reflecting all financial and valuation criteria that may be relevant. In addition, our board of directors generally has broad discretion to modify the formula. Absent changes in the market factor used in the formula, which may change from quarter to quarter as appropriate to reflect changing business, financial and market conditions, and accounting and other impacts unrelated to our value, the mechanical application of the formula tends to reduce the impact of quarterly fluctuations in our operating results on the stock price because the formula takes into account our segment operating income for the four preceding quarters.

      We cannot assure you that the Class A common stock will provide returns in the future comparable to those achieved historically or that the price will not decline.

      The stock price could be subject to greater fluctuations in the future. This volatility is expected to result from the impact on our stock price of:

	•	the mix of our commercial and international business as a proportion of our overall business and the volatility associated with companies in those business areas

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	•	our significant investments in publicly and privately traded companies and the volatility of the price of those companies’ shares
	•	the impact of acquisitions, investments, joint ventures and divestitures that we may undertake

      Our certificate of incorporation and bylaws may discourage or prevent attempts to acquire control of us that are not approved by our board of directors, including transactions in which stockholders might receive a premium for their shares above the stock price. Our stockholders may view such a takeover attempt favorably. In addition, the restrictions may make it more difficult for our stockholders to elect directors not endorsed by us.

      Federal legislation has been proposed that, if adopted, would impose new requirements and restrictions on certain types of retirement plans which could impact our stock system and liquidity. One version of the legislation currently under consideration would limit the level of investment a participant could hold in company stock. If legislation of this nature were adopted, it would be likely that purchases of our stock by our retirement plans would decrease and sales increase. If this occurred, the ability of our stockholders to resell their shares in the limited market may be adversely affected. In addition, reduced purchases (or increased sales) of our stock by the trustees of our retirement plans may adversely impact our liquidity and cash position. Because of the uncertainty of if, when, and in what final form such legislation may be enacted, we are unable to determine the impact this legislation might have on our retirement plans, the operation of our limited market and our liquidity and cash needs.

Forward-Looking Statement Risks

      The information contained in this report or in documents that we incorporate by reference or in statements made by our management includes some forward-looking statements that involve a number of risks and uncertainties. A number of factors, including but not limited to those outlined in the Risk Factors, could cause our actual results, performance, achievements, or industry results to be very different from the results, performance or achievements expressed or implied by these forward-looking statements.

      In addition, forward-looking statements depend upon assumptions, estimates and dates that may not be correct or precise and involve known or unknown risks, uncertainties and other factors. Accordingly, a forward-looking statement in this report is not a prediction of future events or circumstances and those future events or circumstances may not occur. Given these uncertainties and risks, you are warned not to rely on the forward-looking statements. A forward-looking statement is usually identified by our use of certain terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “pro forma,” “anticipates” or “intends,” or by discussions of strategies or intentions. We are not undertaking any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

Item 2.     Properties

      As of January 31, 2002, we conducted our operations in more than 400 offices located in 43 states, the District of Columbia and various foreign countries. We occupy a total of approximately 10,900,000 square feet of space. Of this total, we own or have ownership rights in approximately 2,900,000 square feet, and the balance is leased. Our major locations are in the San Diego, California, Washington, D.C. and Piscataway, New Jersey metropolitan areas, where we occupy approximately 1,300,000 square feet, 2,500,000 square feet and 1,600,000 square feet of space, respectively.

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      We own or have ownership rights in and occupy the following properties:

	•	San Diego metropolitan area

	-	At our primary campus location in San Diego, California, seven buildings totaling approximately 677,000 square feet of space situated on 22.2 acres of land

	•	Washington, D.C. metropolitan area

	-	At our McLean, Virginia campus location, a 287,000 square foot building located on 10 acres of land, and we lease, occupy and have certain rights to purchase three other buildings containing approximately 600,000 square feet of space
	-	In Vienna, Virginia, three buildings totaling approximately 330,000 square feet of space on 33.74 acres of land
	-	In Reston, Virginia, a 62,000 square foot building on 2.6 acres of land

	•	Piscataway, New Jersey metropolitan area

	-	At our Piscataway, New Jersey campus, six buildings totaling approximately 882,000 square feet of space, located on 93 acres of land, and we own an additional 28 acres of vacant land

	•	Other areas

	-	In Huntsville, Alabama, a 100,000 square foot building on 18 acres of land
	-	In Columbia, Maryland, a 95,500 square foot building on approximately 7.3 acres of land
	-	In Virginia Beach, Virginia, an 89,500 square foot building on approximately 13 acres of land
	-	In Orlando, Florida, an 85,000 square foot building on 17.99 acres of land
	-	In Oak Ridge, Tennessee, an 83,000 square foot building on approximately 8.4 acres of land
	-	In Dayton, Ohio, two buildings totaling 79,400 square feet on 4.5 acres of land

      The nature of our business is such that there is no practicable way to relate occupied space to industry segments. We consider our facilities suitable and adequate for our present needs. See Note O of the notes to consolidated financial statements on page F-31 of this Form 10-K for information regarding commitments under leases.

Item 3.     Legal Proceedings

      As previously disclosed, our telecommunications subsidiary, Telcordia, filed a Demand for Arbitration with the International Chamber of Commerce in Paris, France on March 6, 2001, initiating arbitration and seeking damages of approximately $130 million from Telkom South Africa related to a contract dispute. The dispute involves a contract executed on June 24, 1999, pursuant to which Telcordia would provide a Service Activation and Assurance System. The value of Telcordia’s portion of the contracted work was $208 million. Telcordia performed the contract for over 18 months and delivered multiple software releases to Telkom South Africa. On January 12, 2001, Telcordia notified Telkom South Africa that Telkom South Africa had breached the contract for, among other things, taking and using Telcordia software without paying for it, improperly refusing to accept software deliveries, failing to cooperate in defining future software releases, and failing to make other payments due under the contract. On February 2, 2001, Telkom South Africa responded by denying Telcordia’s claims and asserting various breaches on the part of Telcordia. The parties were unable to negotiate a mutually acceptable resolution of the dispute. On March 6, 2001, Telcordia initiated arbitration. On May 22, 2001, Telkom South Africa filed with the International Chamber of Commerce its Answer to Telcordia’s Demand for Arbitration and its Counterclaims against Telcordia.

      Telkom South Africa contends in its Counterclaims that Telcordia breached the contract for, among other things, failing to provide deliverables compliant with the requirements of the contract at the times provided in the contract. Telkom South Africa also contends that Telcordia misrepresented its capabilities and

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      The arbitration hearing to determine the merit of both parties’ substantive claims is currently scheduled to commence in May 2002 in Johannesburg, South Africa. Following this hearing, on a date to be established, the arbitrator will determine the damages to be awarded, if necessary. Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcome of this arbitration is not presently determinable. As of January 31, 2002, the total amount of receivables under the contract, net of deferred revenue, was not significant. Although the ultimate outcome of this arbitration is not presently determinable, an adverse resolution could materially harm our business. For more discussion of the risk, please see “Business — Risk Factors — Risks Relating to Our Business — Unsuccessful resolution of the Telkom South Africa Arbitration could harm our business.”

      We are also involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of our management, is expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.

Executive Officers of the Registrant

      Pursuant to General Instruction G(3) of General Instructions to Form 10-K, the following list is included as an unnumbered Item in Part I of this Form 10-K in lieu of being incorporated by reference from our definitive Proxy Statement used in connection with the solicitation of votes for our 2002 Annual Meeting of Stockholders (the “2002 Proxy Statement”).

      The following is a list of the names and ages (as of March 31, 2002) of all our executive officers, indicating all positions and offices held by each such person and each such person’s principal occupation or employment during at least the past five years. All such persons have been elected to serve until their successors are elected or until their earlier resignation or retirement. Except as otherwise noted, each of the persons listed below has served in his present capacity for at least the past five years.

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PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

The Limited Market

      Since our inception, we have followed a policy of remaining essentially employee owned. As a result, there has never been a general public market for any of our securities. In order to provide liquidity for our stockholders, however, we have maintained a limited secondary market which we call the “limited market,” through our wholly-owned, broker-dealer subsidiary, Bull Inc., which was organized in 1973 for the purpose of maintaining the limited market.

      The limited market permits existing stockholders to offer for sale shares of Class A common stock on predetermined days which we call a “trade date.” Generally, there are four trade dates each year. A trade date typically occurs two weeks after our quarterly board of directors meetings, currently scheduled for January, April, July and October. All shares of Class B common stock to be sold in the limited market must first be converted into 20 times as many shares of Class A common stock. All sales are made at the prevailing price of the Class A common stock determined by the board of directors pursuant to the valuation process described below. All sellers in the limited market (other than our retirement plans and us) pay Bull, Inc. a commission currently equal to 1% of the proceeds from such sales. No commission is paid by purchasers in the limited market.

      The purchase of Class A common stock in the limited market is restricted to (i) current employees of SAIC and eligible subsidiaries who desire to purchase Class A common stock in an amount that does not exceed a pre-approved limit established by the board of directors or the operating committee of the board, (ii) current employees, consultants and non-employee directors of SAIC and eligible subsidiaries who have been specifically approved by the board of directors or the operating committee of the board to purchase a specified number of shares which may exceed the pre-approved limit, and (iii) trustees or agents of the retirement and benefit plans of SAIC and its eligible subsidiaries. These employees, consultants, directors, trustees and agents are referred to as “authorized buyers.” No one, other than these authorized buyers, is eligible to purchase Class A common stock in the limited market.

      If the aggregate number of shares offered for sale in the limited market on any trade date is greater than the aggregate number of shares sought to be purchased by authorized buyers, offers by stockholders to sell 2,000 or less shares of Class A common stock (or up to the first 2,000 shares if more than 2,000 shares of Class A common stock are offered by any such stockholder) will be accepted first. Offers to sell shares in excess of 2,000 shares of Class A common stock will be accepted on a pro-rata basis determined by dividing the total number of shares remaining under purchase orders by the total number of shares remaining under sell orders. If, however, there are insufficient purchase orders to support the primary allocation of 2,000 shares of

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      We are currently authorized, but not obligated, to purchase shares of Class A common stock in the limited market on any trade date, but only if and to the extent that the number of shares offered for sale by stockholders exceeds the number of shares sought to be purchased by authorized buyers, and we, in our discretion, determine to make such purchases. This determination is not made until the trade date. In making this determination, we will consider a variety of factors, including our cash position and cash flows, investment and capital activities, financial performance, financial covenants, the number of shares outstanding and the amount of the under subscription in the market. Based on the trade dates in fiscal years 2002 and 2001, we purchased 14,028,781 and 7,625,797 shares, respectively, in the limited market which accounted for 88.2% and 67.7%, respectively, of the total shares purchased by all buyers in the limited market during fiscal years 2002 and 2001. Such purchases balanced the shares offered for sale by stockholders with the shares sought to be purchased by authorized buyers. There can be no assurance that we will purchase such excess shares in the future.

      During the 2002 and 2001 fiscal years, the trustees of certain of our retirement and benefit plans purchased an aggregate of 1,450,018 and 1,733,624 shares, respectively, in the limited market. These purchases accounted for approximately 9.1% and 15.4% of the total shares purchased by all buyers in the limited market during fiscal years 2002 and 2001, respectively. Such purchases may change in the future, depending on the levels of participation in and contributions to such plans and the extent to which such contributions are invested in Class A common stock.

      New federal legislation is being considered that would impact current retirement plans holding company stock. Certain versions of the legislation currently under consideration would provide participants with certain rights to diversify out of company stock or limit the level of investment a participant could invest in company stock. If legislation with such features is adopted, it could have a significant impact on the level of participation in the limited market by our retirement plans. To the extent that purchases by the trustees of our retirement and benefit plans decrease and purchases by us do not increase or decrease, the ability of stockholders to resell their shares in the limited market will likely be adversely affected. Although all shares of Class A common stock offered for sale were sold in the limited market on each trade date occurring during the last two fiscal years, we cannot assure you that a stockholder desiring to sell all or a portion of his or her shares of our Class A common stock on any trade date will be able to do so.

      To the extent that the aggregate number of shares sought to be purchased by authorized buyers exceeds the aggregate number of shares offered for sale by stockholders, we may, but are not obligated to, sell authorized but unissued shares of Class A common stock in the limited market. This determination is not made until the trade date. In making this determination, we will consider a variety of factors, including our cash position and cash flows, investment and capital activities, financial performance, financial covenants, the number of shares outstanding and the amount of the over subscription in the market. In fiscal years 2002 and 2001, we did not sell any shares of Class A common stock in the limited market as the number of shares sought to be purchased by authorized buyers did not exceed the number of shares offered for sale by stockholders. To the extent that we choose not to sell authorized but unissued shares of Class A common stock in the limited market, the ability of individuals to purchase shares on the limited market may be adversely affected. We cannot assure you that an individual desiring to buy shares of our Class A common stock in any future trade will be able to do so.

Price Range of Class A Common Stock and Class B Common Stock

      Our board of directors determines the price of the Class A common stock using the valuation process described below. The board of directors reviews and sets the market factor in the formula, which is set forth below and used in the valuation process, at the value which causes the formula to yield the stock price that the board believes represents a fair market value for the Class A common stock. The Class A common stock is traded in the limited market maintained by Bull, Inc. at the stock price determined by the board of directors. Our board of directors reviews the stock price at least four times each year, generally at quarterly meetings.

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      The following formula is used in the valuation process:

        the price per share is equal to the sum of

	(1) a fraction, the numerator of which is our stockholders’ equity at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur, adjusted to reflect the value of publicly traded equity securities classified as investments in marketable securities, as well as the profit or loss impact, if any, on stockholders’ equity arising from investment activities, non-recurring gains or losses on sales of business units, subsidiary common stock, or similar transactions closed, as of the valuation date (“E”), and the denominator of which is the number of outstanding common shares and common share equivalents at the end of such fiscal quarter (“W1”) and
	(2) a fraction, the numerator of which is 5.66 multiplied by the market factor (“M” or “market factor”), multiplied by our operating income for the four fiscal quarters immediately preceding the price determination, net of taxes, excluding investment activities, losses on impaired intangible assets, non-recurring gains or losses on sales of business units, subsidiary common stock and similar items, and including equity in the income or loss of unconsolidated affiliates and the minority interest in income or loss of consolidated subsidiaries (“P”), and the denominator of which is the weighted average number of outstanding common shares and common share equivalents for those four fiscal quarters, as used by us in computing diluted earnings per share (“W”).

      The formula, shown as an equation, is as follows:

      The number of outstanding common shares and common share equivalents described above in the formula assumes that each share of Class B common stock is converted into 20 shares of Class A common stock.

      The board of directors first used a valuation formula in establishing the price of the Class A common stock in 1972. The valuation formula has periodically been modified ever since. The market factor concept was first added to the formula in 1973 and was mechanically linked to the performance of Nasdaq until 1984. The 5.66 factor was added to the formula in 1976 in connection with other modifications and has not been assessed for change since that time. The 5.66 factor was added as a constant to cause the price generated by the formula to reflect a fair market value of the Class A common stock. In 1984, the board of directors, with the assistance of an outside appraisal firm, began its current practice of establishing the value of the market factor to reflect the broad range of business, financial and market forces that also affect the fair market value of the Class A common stock.

      At its April 2001 meeting, the board of directors approved the modifications of the definitions of the “E” or the stockholders’ equity component and “P” or the earnings component of the formula, effective as of the July 2001 valuation. The revised definitions of these terms are set forth above in the discussion of the formula. Before approving these changes to the formula, the board of directors consulted with Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (“HLHZ”), an independent valuation firm, and determined that these definitional changes are appropriate and that our valuation process will continue to generate a fair market value of the Class A common stock within a broad range of financial criteria. All other terms of the formula remained unchanged.

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      The board of directors has broad discretion to modify the valuation process. However, the board of directors does not anticipate changing the valuation process unless:

	•	a change in the formula or any other aspect of the valuation process used to value the Class A common stock is required under applicable law, or
	•	in the good faith exercise of its fiduciary duties and after consultation with our independent accountants as to whether the change would result in a charge to earnings upon the sale of Class A common stock, the board of directors, including a majority of the directors who are not our employees, determines that the valuation process no longer results in a fair market value for the Class A common stock, or
	•	in the good faith exercise of its fiduciary duties, the board of directors, including a majority of directors who are not our employees, after consulting with an independent appraisal firm, determines that a change in the formula or any other aspect of the valuation process is appropriate and that the stock price established by the board of directors through the modified valuation process reflects a fair market value of the Class A common stock.

      In determining the price of the Class A common stock, the board of directors considers many relevant factors, including:

	•	the performance of the general securities markets and relevant industry groups
	•	our historical financial performance versus comparable public companies
	•	the prospects for our future performance
	•	the value of our investments
	•	general economic conditions
	•	valuation input from HLHZ

      In conjunction with the board of directors’ valuation process, HLHZ prepares an appraisal of the Class A common stock. The stock price and market factor, as determined by the board of directors, remain in effect until subsequently changed by the board of directors. The board of directors has authorized its stock policy committee to review the stock price during the period between meetings of the board of directors to determine whether the stock price continues to represent a fair market value, and if necessary, modify the price. If the stock policy committee considered it appropriate to modify the stock price, it would apply the same valuation process used by the board of directors. The board of directors believes that the current valuation process results in a value which represents a fair market value for the Class A common stock within a broad range of financial criteria.

      The price of the Class A common stock could be subject to significant fluctuations in the future due to a number of factors, including:

	•	the mix of our commercial and international business as a proportion of our overall business and the volatility associated with companies in these business areas
	•	our significant investments in publicly and privately traded companies and the volatility of the price of those companies’ shares
	•	the impact of acquisitions, investments, joint ventures and divestitures that we may undertake

Stock Price Tables

      The following tables set forth information concerning the formula price for the Class A common stock, the applicable price for the Class B common stock and each of the variables contained in the formula, including the market factor, in effect for the periods beginning on the dates indicated. As indicated above, the definitions of “E” or stockholders’ equity and “P” or earnings in the formula were modified effective as of the July 2001 valuation. The data in the following table is based on the modified definitions but the data in the

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(1)	“E” or Stockholders’ Equity is our stockholders’ equity at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur, adjusted to reflect the value of publicly traded equity securities classified as investments in marketable securities, as well as the profit or loss impact, if any, on stockholders’ equity arising from investment activities, non-recurring gains or losses on sales of business units, subsidiary common stock, or similar transactions closed, as of the valuation date.
(2)	“W1” or Shares Outstanding is the number of outstanding common shares and common share equivalents at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur.
(3)	“P” or Earnings is our operating income for the four fiscal quarters immediately preceding the price determination, net of taxes, excluding investment activities, losses on impaired intangible assets, non-recurring gains or losses on sales of business units, subsidiary common stock and similar items, and including our equity in the income or loss of unconsolidated affiliates and the minority interest in income or loss of consolidated subsidiaries. The aggregate amount of these items on a pre-tax basis is disclosed as “segment operating income” in our consolidated quarterly and annual financial statements filed with the SEC.
(4)	“W” or Weighted Average Shares Outstanding is the weighted average number of outstanding common shares and common share equivalents for the four fiscal quarters immediately preceding the price determination, as used by us in computing diluted earnings per share.
(5)	Value shown represents the percentage change in the price per share of Class A common stock from the prior quarterly valuation.

      The following table sets forth information concerning the formula price and the variables contained in the formula as used in the April 13, 2001 and preceding valuations.

(1)	“E” or Stockholders’ Equity is our stockholders’ equity at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur.
(2)	“W1” or Shares Outstanding is the number of outstanding common shares and common share equivalents at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur.
(3)	“P” or Earnings is our net income for the four fiscal quarters immediately preceding the price determination.
(4)	“W” or Weighted Average Shares Outstanding is the weighted average number of outstanding common shares and common share equivalents for the four fiscal quarters immediately preceding the price determination, as used by us in computing diluted earnings per share.

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(5)	Value shown represents the percentage change in the price per share of Class A common stock from the prior quarterly valuation.

Holders of Class A Common Stock and Class B Common Stock

      As of March 31, 2002, there were 31,861 holders of record of Class A common stock and 178 holders of record of Class B common stock. Substantially all of the Class A common stock and the Class B common stock is owned of record by our current and former employees, directors and consultants and their respective family members and by our various employee benefit plans.

Dividend Policy

      We have never declared or paid any cash dividends on our capital stock and no cash dividends on the Class A common stock or Class B common stock are contemplated in the foreseeable future. The payment of any future dividends will be at the discretion of the board of directors and will depend upon, among other things, future earnings, capital requirements, our general financial condition and general business conditions.

      The following data has been derived from the audited consolidated financial statements. The consolidated balance sheet at January 31, 2002 and 2001 and the related consolidated statements of income and of cash flows for each of the three years in the period ended January 31, 2002 and notes thereto appear elsewhere in this Form 10-K. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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(1)	Telcordia was acquired in the fourth quarter of 1998; therefore, a full year of operations is not reflected.
(2)	Includes gain on sale of subsidiary stock of $698 million in 2000.
(3)	Includes impairment losses of $467 million and $1.4 billion on marketable equity securities and other private investments in 2002 and 2001, respectively, and gains of $4.1 billion from sales or exchanges of marketable equity securities and other investments in 2001.
(4)	The 2002 amount includes the cumulative effect of accounting change.

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      We provide diversified professional and technical services involving the application of scientific expertise to solve complex technical problems for a broad range of government and commercial customers in the U.S. and abroad. These services frequently involve computer and systems technology. Through our Telcordia Technologies, Inc. subsidiary (“Telcordia”), we are a global provider of software, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry.

      The following discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Quantitative and Qualitative Disclosures About Market Risk,” which follows, should be read in conjunction with the consolidated financial statements and contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations and the impact of competition. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to: a decrease in or the failure to increase business with the U.S. Government, regional Bell operating companies (“RBOCs”) and international and commercial customers; our ability to continue to identify, consummate and integrate additional acquisitions; our ability to competitively price our technical services and products; the risk of early termination of U.S. Government contracts; the risk of losses or reduced profits on firm fixed-price and target cost and fee with risk sharing contracts; a failure to obtain reimbursement for costs incurred prior to the execution of a contract or contract modification; audits of our costs, including allocated indirect costs, by the U.S. Government; a downturn in economic conditions, limited market trade activity, legislative proposals and other uncertainties, all of which are difficult to predict and many of which are beyond our control. Given these uncertainties and risks, you are warned not to rely on such forward-looking statements. We are not undertaking any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments. Additional information about potential factors that could affect our business and financial results is included in the section titled “Risk Factors” on page 7.

Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on an on-going basis including those relating to allowances for doubtful accounts, inventories, fair value and impairment of investments, fair value and impairment of intangible assets and goodwill, income taxes, warranty obligations, restructuring charges, estimated profitability of long-term contracts, pensions and other postretirement benefits, contingencies and litigation. Our estimates and assumptions have been prepared on the basis of the most current available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.

      We have several critical accounting policies that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:

	•	Contract revenues — As discussed under “Contract Revenues” in Note A of the notes to consolidated financial statements, our revenues are primarily recognized using the percentage-of-completion method as described in Statement of Position 81-1, “Accounting for Performance of Construction-Type and

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		Certain Production-Type Contracts.” Under the percentage-of-completion method, revenues are recognized as services are performed, with performance normally measured by comparing contract costs incurred to date with total estimated costs at completion. Estimating costs at completion on these long-term contracts is complex and involves significant judgment about uncertain matters due to the long-term nature of the contract and the technical nature of our services. We have procedures and processes in place to monitor the actual progress of a project against estimates. Should the estimates indicate that we will experience a loss on the contract, we will be required to recognize the estimated loss at the time it is determined. Additional information may subsequently indicate that the loss is more or less than initially recognized which would require further adjustment in our financial statements. Any adjustment as a result of a change in estimate, whether it is a loss or an adjustment to revenue, is made on a prospective basis when events or estimates warrant an adjustment. Estimates are updated quarterly or sooner if circumstances warrant it.
	•	Investments in marketable securities — As discussed under “Investments In Marketable Securities” in Note A of the notes to consolidated financial statements, our marketable equity securities are carried on the balance sheet at fair value, with changes in fair value recorded through equity. When the market value of a security falls below its cost basis and the decline is deemed to be other-than-temporary, GAAP requires the difference between cost and market value to be treated as a realized loss. Similarly, other cost method and equity method investments must be marked down if an other-than-temporary decline occurs. In determining whether a decline is other-than-temporary, management must consider a wide range of factors such as the period of time that the market value of the security or investment has been below its cost, the operating performance of the entity and our investment intent. Management judgments about these factors may impact the timing of when an other-than-temporary loss is recognized.
	•	Derivative instruments — As discussed in Note E of the notes to consolidated financial statements, we use derivative instruments for risk management purposes. GAAP requires all derivative instruments to be recorded on the balance sheet as either assets or liabilities measured at fair value. Often, quoted market prices are not available, so we are required to estimate the fair value of the instruments. Fair value estimates might be provided by the counterparty to the instrument or we may use cash flow or other models to determine a fair value. In all cases, estimates and assumptions as of a specific point in time, often about future financial prices and rates that are truly continuous in nature, are required to arrive at a fair value. The estimated fair value of the derivative instruments does not necessarily reflect the future settlement amount since the fair value is calculated at various points in time using estimates, assumptions and factors relevant to that particular point in time. Because of the factors used to estimate fair value, the ultimate gain or loss on the derivative could differ from the amount recorded in the prior financial statements.
	•	Pension and other postretirement benefit plans — As discussed in Note J of the notes to consolidated financial statements, we provide retiree benefits that are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” Telcordia has both a defined benefit pension plan and a retiree medical plan. Calanais, our foreign subsidiary in Scotland has a defined benefit pension plan. These statements require recognition of the cost of providing these benefits over the period the employee is working. These calculations are made by an actuary and involve significant assumptions about the expected cost of the benefits and the expected return on the assets. Note J discloses the most important assumptions, which include the discount rate used to value the future obligation, the rate of future compensation increases, the expected return on plan assets and health care cost trend rate. We select these assumptions based on current and long-term views of many factors and make our best effort to select the appropriate assumptions. Changes in these key assumptions can have a significant impact on the amount of our liability to retirees, the amount we are required to fund and the amount of cost recognized in the consolidated financial statements.

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Results of Operations

      Our consolidated financial statements include the accounts of all of our majority-owned and wholly-owned U.S. and international subsidiaries which are discussed in Note A of the notes to consolidated financial statements. We use the equity method to account for our investments in affiliates and corporate joint ventures where we have an ownership interest representing between 20% and 50%, or over which we exercise significant influence. In such investments and joint ventures, we recognize our proportionate share of our affiliates’ net income or loss as “Other income (expense), net” in our consolidated statements of income but do not consolidate the affiliates’ assets and liabilities. The amount of revenues we recognized from contracts with these related affiliates has not been material. Our equity investments in such affiliates are recorded on the consolidated balance sheet as “Other assets” and further discussed in Note C of the notes to consolidated financial statements.

      During 2000, our former partially-owned subsidiary NSI was consolidated in our consolidated financial statements. As a result of a series of transactions reducing our ownership in NSI at the end of 2000, including the recomposition of the NSI Board of Directors, effective at the beginning of 2001, we no longer consolidated NSI (“deconsolidation”).

      Our revenues increased 3%, 7% and 17% in 2002, 2001 and 2000, respectively, over the prior year. Adjusting 2000 revenues for the deconsolidation of NSI as described above, revenue growth was 11% in 2001. Our revenues in 2002 from our U.S. Government and non-telecommunications commercial customers increased 9% over the same period of the prior year. However, difficulties in the global telecommunications market caused our commercial telecommunications revenue to decrease 10% as further discussed below.

      We have three reportable segments: Regulated, Non-Regulated Telecommunications and Non-Regulated Other as discussed in Note B of the notes to consolidated financial statements. We assess the performance of our operating groups, which are aggregated into the three reportable segments, depending on the nature of the customers, the contractual requirements and regulatory environment governing our services. Groups in the Regulated segment provide technical services and products through contractual arrangements as either a prime contractor or subcontractor to other contractors, primarily for departments and agencies of the U.S. Government. Operations in the Regulated segment are subject to specific regulatory accounting and contracting guidelines such as Cost Accounting Standards and Federal Acquisition Regulations. Groups in the Non-Regulated Telecommunications and Non-Regulated Other segment provide technical services and products primarily to customers in commercial markets. Generally, operations in the Non-Regulated Telecommunications and Non-Regulated Other segment are not subject to specific regulatory accounting or contracting guidelines. Groups in the Non-Regulated Telecommunications segment are primarily involved in the telecommunications business area. For 2002, 2001 and 2000, our Telcordia subsidiary made up the Non-Regulated Telecommunications segment.

      Regulated segment revenues as a percentage of consolidated revenues were 64%, 62% and 59% in 2002, 2001 and 2000, respectively, and on an absolute basis, increased 7%, 11% and 19% in 2002, 2001 and 2000, respectively. The growth in Regulated segment revenues on an absolute basis in 2002 and 2001 was lower than the prior year because we made fewer acquisitions in this segment than in prior years. In 2000, we experienced higher growth through acquisitions. Since we derive a substantial portion of our revenues from the U.S. Government as either a prime contractor or subcontractor, our revenues could be adversely impacted by a reduction in the overall level of U.S. Government spending and by changes in its spending priorities from year to year. Obtaining U.S. Government contracts remains a highly competitive process. We have seen our growth in revenues with the U.S. Government continue to shift toward service type contracts which are competitively priced utilizing lower cost structures. This shift reflects the increasingly competitive business environment in our traditional business areas, as well as our increased success in the engineering and field services markets, which typically involve these lower cost service type contracts.

      Non-Regulated Telecommunications segment revenues as a percentage of consolidated revenues were 24%, 27% and 25% in 2002, 2001 and 2000, respectively, and on an absolute basis, decreased 10% in 2002 and increased 15% and 12% in 2001 and 2000, respectively. The decrease in 2002 was directly attributable to the downturn in the global telecommunications market which affected Telcordia’s revenues. The growth in

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      Non-Regulated Other segment revenues as a percentage of consolidated revenues were 13%, 11% and 15% in 2002, 2001 and 2000, respectively, and on an absolute basis, increased 18% in 2002, decreased 22% in 2001 and increased 14% in 2000. The increase in 2002 in Non-Regulated Other segment revenues as a percentage of consolidated revenues and on an absolute basis was primarily attributable to growth in our commercial and international information technology outsourcing business, including our INTESA joint venture, which represented 6% of consolidated revenues in 2002. The decrease in 2001 in Non-Regulated Other segment revenues as a percentage of consolidated revenues and the reduction in revenue on an absolute basis was attributable to the deconsolidation of NSI and the sale of our TransCore business unit in 2000. Adjusting for the deconsolidation of NSI and the sale of TransCore, Non-Regulated Other segment revenues, on an absolute basis, increased 20% in 2001 and would have been 10% of consolidated revenues in 2000. The increase in Non-Regulated Other segment revenues in 2001, after adjustment, was primarily attributable to growth in our information technology outsourcing business in the United States and United Kingdom. In 2001 compared to 2000, we had lower revenues from INTESA as a result of a lower level of services required by Petroleos de Venezuela, S.A. (“PDVSA”), Venezuela’s national oil company and INTESA’s primary customer and joint venture partner. In 2000, Non-Regulated segment revenues experienced slower growth than the prior year in certain commercial and international markets in the United Kingdom, Australia and Colombia. Additionally, the TransCore business unit was sold during 2000. In order to continue our growth in this segment, we plan for our revenues from customers outside the U.S., particularly in Venezuela and the United Kingdom, to continue to increase in the future. Consequently, we are increasingly subject to the political and economic trends in these foreign countries. The political and economic environment in Venezuela is currently unstable and we are uncertain what impact, if any, this may have on INTESA’s business. The outsourcing contract with PDVSA expires on June 30, 2002. It is uncertain whether PDVSA will renew the contract, recompete the work or take other action regarding the contract.

      Revenues on our contracts in the three reportable segments are generated from the efforts of our technical staff as well as the pass-through of costs for material and subcontract efforts, which primarily occur on large, multi-year systems integration type contracts. At the end of 2002, we had approximately 37,700 full-time employees compared to 38,900 and 36,500 at the end of 2001 and 2000, respectively. Material and subcontract (“M&S”) revenues were $1.4 billion in 2002, $1.2 billion in 2001 and $1.1 billion in 2000. M&S revenues as a percentage of consolidated revenues increased to 23% in 2002 from 20% in 2001 and 2000.

      The following table summarizes revenues by contract type for the last three years:

      Cost-reimbursement contracts provide for the reimbursement of direct costs and allowable indirect costs, plus a fee or profit component. Target cost and fee with risk sharing contracts provide for the customer to

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      The growth of our business is directly related to the receipt of contract awards and contract performance. We performed on 961 contracts with annual revenues greater than $1 million in 2002 compared to 851 and 762 such contracts in 2001 and 2000, respectively. These larger contracts represented 74% of our revenues in 2002, 70% in 2001 and 62% in 2000. Of these contracts, 78 contracts had individual revenues greater than $10 million in 2002 compared to 76 such contracts in 2001 and 61 in 2000. The remainder of our revenues is derived from a large number of individual contracts with revenues of less than $1 million. Although we have committed substantial resources and personnel needed to pursue and perform larger contracts, we believe we also maintain a suitable environment for the performance of smaller, highly technical research and development contracts. These smaller programs often provide the foundation for our success on larger procurements.

      Cost of revenues as a percentage of revenues was 80.1% in 2002, 78.5% in 2001 and 77.8% in 2000. The increase in 2002 was primarily attributable to overruns on certain FFP contracts in the Regulated segment and to the decrease in revenues at Telcordia. Telcordia revenues have more of their associated costs in selling, general and administrative (“SG&A”). Excluding NSI’s cost of revenues because of the deconsolidation of NSI in 2001, cost of revenues as a percentage of revenues were 79.5% in 2000 compared to 78.5% in 2001. The decrease in cost of revenues as a percentage of revenues in 2001 was primarily attributable to improved operating performance in the traditional business areas with the U.S. Government in the Regulated segment offset by higher cost of revenues as a percentage of revenues in the Non-Regulated Telecommunications and Non-Regulated Other segments. In 2001, we experienced overruns on certain FFP contracts in the Non-Regulated Telecommunications segment and had lower-than-historical profit at INTESA and in certain of our commercial information technology and outsourcing businesses, which are part of the Non-Regulated Other segment.

      Selling, general and administrative expenses are comprised of general and administrative (“G&A”), bid and proposal (“B&P”) and independent research and development (“IR&D”) expenses and included impairment losses on intangible assets of $3.1 million, $7.7 million and $50.5 million in 2002, 2001 and 2000, respectively. We assess potential impairments on intangible assets and other long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset’s carrying value unlikely and the carrying amount of the asset exceeds the estimated future undiscounted cash flows. The impairment loss in 2002 reduced goodwill on a small acquisition Telcordia completed at the beginning of 2002. The impairment losses in 2001 reduced goodwill and other identifiable intangible assets on four previously acquired businesses to their estimated recoverable value. Of the total impairment losses taken in 2000, $42.3 million was related to a business unit in the Non-Regulated Other segment, which was acquired in 2000 and represented less than

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      SG&A expenses as a percentage of consolidated revenues were 12.6%, 14.7% and 15.9% in 2002, 2001 and 2000, respectively. Excluding NSI in 2000 because of the deconsolidation in 2001, SG&A expenses as a percentage of consolidated revenues would have been 14.6% in 2000 and included the impairment losses discussed above. If the 2000 SG&A expenses were adjusted to exclude the effects of impairment losses, SG&A would have been 13.6% of consolidated revenues. SG&A as a percentage of revenues in the Regulated and Non-Regulated Other segment decreased in 2002 compared to 2001. The decrease in the Regulated segment’s SG&A to 5.7% in 2002 from 6.2% in 2001 is primarily attributable to continued economies of scale and close monitoring of our SG&A costs. The decrease in the Non-Regulated Other segment is primarily attributable to decreased G&A, marketing and IR&D spending; in the prior year, we initiated new business startups in this segment which caused SG&A costs to increase. In addition, late in 2001, we sold two business units in the Non-Regulated Other segment which had high SG&A costs as a percentage of their revenues. SG&A as a percentage of revenues remained relatively constant at 30.4% in the Non-Regulated Telecommunications segment in 2002 compared to 29.9% in the prior year. Telcordia started 2002 with expectations to maintain SG&A spending. As the industry decline became apparent, Telcordia took actions to reduce the workforce and eliminate non-essential spending. By the end of 2002, the effects of Telcordia’s cost control efforts resulted in keeping its overall SG&A costs aligned with its decrease in revenues for 2002.

      Regulated segment operating income as a percentage of its revenues was 6.6% in 2002, 7.4% in 2001 and 6.6% in 2000. The decrease in 2002 was primarily attributable to overruns on certain FFP contracts. The increase in 2001 over the prior year was due to overall improvements in operating performance as noted previously in the discussion of cost of revenues.

      Our Non-Regulated Telecommunications segment operating income as a percentage of its revenues was 13.2% in 2002, 12.0% in 2001 and 13.4% in 2000, and decreased in 2001 primarily due to losses recognized on certain FFP contracts. Throughout 2002, market conditions have been difficult in the telecommunications industry and have affected Telcordia. In response to the downturn in the global telecommunications market, Telcordia had involuntary workforce reductions of 2,100 employees and 650 contractors throughout 2002 to realign its staffing levels to reduced market demand. During 2002 we recorded a restructuring charge of $85 million for the workforce reduction of which $59 million has been reflected in cost of revenues with the remaining balance in SG&A expenses. Workforce reduction costs in 2002 consisted of special termination pension benefits of $62 million as well as outplacement services, extension of medical benefits, other severance benefits and costs related to closing facilities of $23 million. The special termination pension benefits have been funded through Telcordia’s surplus pension assets and allocated to the participants’ pension accounts as appropriate. The special termination pension benefits will be paid from the pension trust as plan obligations and represent a non-cash charge. During 2002, we accrued $22 million of other severance benefits and facilities closure costs and paid out $15 million. As a result, accrued liabilities and accrued payroll and employee benefits include accrued other severance benefits and facilities closure costs still to be paid of $7 million as of January 31, 2002. We recognized a non-cash gain of $10 million for the curtailment of pension benefits related to the workforce reduction, $8 million of which is reflected in cost of revenues with the remaining balance in SG&A expenses. We do not expect market conditions to improve in the near term and while we believe we have realigned staffing levels at Telcordia, we cannot be certain that we will not have future involuntary workforce reductions. Despite the restructuring charge at Telcordia, segment operating income as a percentage of its revenues increased in 2002 as the effects of the workforce reduction and other cost control efforts were realized in the fourth quarter of 2002. Furthermore, in 2002, Telcordia did not have any material overruns on FFP contracts as it did in 2001.

      Our Non-Regulated Other segment operating income as a percentage of its revenues was 8.1% in 2002 and 2.7% in 2000. In 2001 our Non-Regulated Other segment had a slight segment operating loss that represented .1% of its revenues. The increase in 2002 compared to 2001 was attributable to two primary factors: the sale or dissolution of three business units in the prior fiscal year that had consistent operating losses, and the improvement in segment operating income from our commercial and international information

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      Interest income was $52 million, $109 million and $55 million in 2002, 2001 and 2000, respectively. The decrease in 2002 was primarily attributable to lower average cash and short-term investment balances. In 2001, the cash proceeds of $1.6 billion from the sale of NSI common stock generated interest income as those proceeds were invested. In 2000, cash proceeds of $729 million were received from the sale of NSI stock which generated additional interest income.

      Interest expense of $18 million, $20 million and $27 million in 2002, 2001 and 2000, respectively, primarily relates to interest on our outstanding public debt securities, a building mortgage, deferred compensation arrangements, capital lease obligations and notes payable. The decrease in interest expense in 2002 and 2001 compared to the prior year was primarily driven by a decrease in capital lease obligations at INTESA.

      Other income, net, was $11 million in 2002 and $25 million in 2001, compared to an expense of $1 million in 2000. The decrease in 2002 was primarily attributable to lower equity income from our share of income from our unconsolidated affiliates. In 2001, prior to the merger of NSI and VeriSign, Inc. (“VeriSign”), we recognized our share of income from NSI as an unconsolidated affiliate. The increase in 2001 was primarily attributable to our share of income in NSI and other unconsolidated affiliates compared to 2000 when we had our share of losses in our unconsolidated affiliates.

      Minority interest in income of consolidated subsidiaries was $17 million, $13 million and $44 million in 2002, 2001 and 2000, respectively. We record minority interest in income for third party interests in our joint ventures, INTESA and AMSEC LLC and our subsidiary, ANXeBusiness Corp. The increase in 2002 was primarily attributable to INTESA and AMSEC LLC. The decrease in 2001 was primarily attributable to the deconsolidation of NSI. Partially offsetting the decrease in 2001 was the 45% minority interest in our AMSEC LLC joint venture, which was formed in the second quarter of 2000.

      The provision for income taxes as a percentage of income before income taxes was 32.7% in 2002, 37.2% in 2001 and 41.6% in 2000. The lower overall effective tax rate in 2002 reflects a lower state effective tax rate and the favorable resolution of certain tax positions with state and federal tax authorities. The tax rate was also favorably impacted by higher levels of research and experimentation tax credits and charitable contributions of appreciated property. The effective rate in 2001 was lower than the prior year for the same reasons as 2002 except that we still were in an on-going appeals process with the tax authorities for fiscal years 1988 through 1993 and had certain open tax positions that were not resolved. In addition, in 2001, charitable contributions of appreciated property were less than in 2002.

      Effective at the beginning of 2002, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 establishes accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement also requires that changes in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria are met. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”), which is a component of stockholders’ equity, and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged

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Gain on Sale of Business Units, Net

      Gains or losses related to sales of a business unit or operating asset that generated revenue or whose operating results were included in our consolidated financial statements are recorded as “Gain on sale of business units, net” and are part of operating income.

      In 2002, we recognized a net gain before income taxes of $10 million from the sale of two business units and the settlement of contingent liabilities related to business units sold in 2001. In 2001, we sold certain business units and operating assets that did not fit within our strategic plan and recorded net gains of $121 million before income taxes on these business units and operating assets that were sold for cash and/or equity or debt securities of publicly traded companies. In 2000, net gains from sale of business units and operating assets were $30 million.

Net (Loss) Gain on Marketable Securities and Other Investments, Including Impairment Losses

      Gains or losses related to transactions from our investments that are accounted for as marketable equity or debt securities, as cost method investments or as equity method investments are recorded as “Net (loss) gain on marketable securities and other investments, including impairment losses” and are part of non-operating income or expense. Impairment losses on marketable securities and other investments resulting from declines in fair market values that are deemed to be other-than-temporary are also recorded in this financial statement line item.

      In accordance with our policy to assess whether an impairment loss on our marketable and private equity securities has occurred due to declines in fair market value and other market conditions, we determined that at January 31, 2002 and 2001, declines in the fair market value of VeriSign and certain of our other investments occurred and were deemed to be other-than-temporary in nature. We, therefore, recorded impairment losses of $467 million and $1.4 billion in 2002 and 2001, respectively, on these investments.

      In 2002, we recognized a net loss before income taxes of $39 million on the sale of certain marketable securities and other investments compared to a net gain before income taxes of $53 million and $3 million in 2001 and 2000, respectively. The largest component of the net loss for 2002 was the sale of VeriSign shares which resulted in a loss before income taxes of $48 million, which was partially offset by a net gain before income taxes of $9 million from the sale of certain other investments. The largest component of the net gain in 2001 was the sale of an equity interest in a French business in exchange for equity securities of a French public company.

      As more fully discussed in Note E of the notes to consolidated financial statements, we are exposed to certain market risks which are inherent in the financial instruments arising from transactions entered into in the normal course of business. Our portfolio of publicly-traded marketable equity securities is subject to market risk and there are instances where we will use derivative instruments to manage the risk of potential loss in fair value resulting from decreases in market prices. We have equity collars in place to mitigate the risk of significant price fluctuations of certain of our marketable equity securities. These equity collars are derivative instrument transactions where we lock in a ceiling and floor price for the underlying equity security. Certain of these collars allow us to put the underlying equity shares to the collar counterparty during the term of the collar while certain other collars do not allow us to settle until the expiration of the collar. We also have warrants to purchase equity securities of certain private and publicly-held companies that at time of exercise can be net settled, which means we would receive the difference between our exercise price and fair value of the shares in additional shares. These warrants are considered derivative instruments and are not designated as hedging instruments. Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, changes in the derivative instrument’s fair value for fair value hedges and changes in derivative instruments not designated as hedging instruments are recognized currently in the results of operations. We

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      In 2002, we recognized a gain before income taxes of $21 million related to our former investment in Solect Technology Group (“Solect”) which was acquired by Amdocs Limited (“Amdocs”), a publicly traded company, in 2001. In 2001, we recognized a gain before income taxes of $191 million on the exchange of our interest in Solect for an approximate 2% equity interest in Amdocs. Under the terms of the exchange agreement, a portion of the Amdocs shares were held in escrow and would only be released if certain conditions were met. In 2002, these conditions were met and the shares were released from escrow resulting in the additional gain.

      In 2001, we completed two transactions related to our former subsidiary, NSI. On February 11, 2000, NSI completed a secondary offering of 8,889,500 shares of its common stock. Of the shares sold in the offering, we sold 6,700,000 shares, NSI sold 2,159,500 shares and other selling stockholders sold 30,000 shares at $247 per share before deducting underwriting commissions of $9.75 per share. As a result of this transaction, we received net proceeds from the offering of $1.6 billion and recognized a gain on sale before income taxes of $1.5 billion. We also recognized a gain as a result of the shares sold by NSI by recording $132 million directly to additional paid-in capital which we have included in “Issuance of subsidiary stock” in our consolidated statement of stockholders’ equity and comprehensive income. Upon completion of this secondary offering and after giving effect to NSI’s 2-for-1 stock split, we held 16,300,000 shares of NSI common stock which represented a 22.6% interest in NSI. On June 8, 2000, NSI merged into and became a wholly-owned subsidiary of VeriSign, a publicly traded company and leading provider of Internet trust services. On the effective date of the merger, we held approximately 9% of VeriSign’s outstanding shares. As a result of this transaction, we recognized a gain before income taxes of $2.4 billion.

      In 2000, we recognized a gain before income taxes of $698 million from the sale of NSI common stock. Since NSI was consolidated in 2000, this gain was classified as a “Gain on sale of subsidiary common stock” in our consolidated financial statements. The gain resulted from a secondary offering of 4,580,000 shares of NSI common stock completed on February 12, 1999. Of the shares sold in the offering, we sold 4,500,000 shares at $170 per share and received proceeds, net of underwriter’s commissions, of $729 million.

Liquidity and Capital Resources

      Our primary sources of liquidity continue to be funds provided by operations and our five-year revolving credit facility which expires in August 2002. We expect new credit facility arrangements to be completed during the second quarter ending July 31, 2002. Due to current market conditions, the pricing terms of the new credit facility are expected to be less favorable than the current credit facility.

      Besides funds from operations and our credit facility, the proceeds from the sale of NSI common stock in February 2000 provided an additional source of liquidity for us in 2001. At January 31, 2002 and 2001, there were no borrowings outstanding under the credit facility and cash and cash equivalents and short-term investments totaled $1.2 billion and $1.3 billion, respectively. Cash flows generated from operating activities were $663 million in 2002 compared to $171 million in 2001 and $434 million in 2000. Net cash provided by operating activities in 2002 consisted primarily of net income of $19 million adjusted for an increase in non-cash items aggregating $758 million, offset by $114 million used in working capital and other activities. Net cash used in working capital and other activities primarily resulted from payments of accounts payable and income taxes. Cash flows generated in 2001 decreased primarily as a result of income taxes paid of $710 million compared to $481 million in 2000.

      Our investing activities generated cash flows of $243 million in 2002 and $749 million in 2001 compared to a use of cash of $7 million for investing activities in 2000. In 2002, we generated cash primarily from the sale of short-term marketable securities. We also decreased our capital expenditures and the level of investments in private companies by our subsidiary, SAIC Venture Capital Corporation. In 2001, our largest source of cash came from our sale of NSI common stock from which we received $1.6 billion in cash. During 2001, we used $682 million of this cash to buy short-term investments, which are managed as portfolios by outside investment managers, and made investments in publicly traded companies and private emerging

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      We used cash of $1.1 billion, $938 million and $144 million for financing activities in 2002, 2001 and 2000, respectively. The increase in 2002 in the use of cash for financing activities was primarily attributable to repurchases of our common stock. In 2002, we repurchased $189 million of common stock from employees upon their termination compared to $134 million in 2001 and $65 million in 2000. We also repurchased $338 million, $429 million and $43 million of our common stock from our 401(k) and retirement and profit sharing plans (collectively referred to as “the Plans”) in 2002, 2001 and 2000, respectively. In 2001, we enacted a provision of our 401(k) plans which required terminated participants to transfer their assets out of the SAIC stock funds. Prior to this point in time, participants who had terminated were not required to transfer their assets out of the SAIC stock funds. As a result, we had an unusually high level of repurchases from the Plans in 2001. In 2002, we provided our participants in the Plans with a limited window in which to exchange out of the non-exchangeable SAIC stock funds, which resulted in increased repurchases from the Plans. Although we have no obligation to make such purchases, we purchased stock in recent quarterly stock trades in which more shares were offered for sale than the aggregate number of shares sought to be purchased by authorized buyers. We repurchased $550 million of common stock in the quarterly trades and in other stock transactions with active employees in 2002 compared to $364 million in 2001 and $72 million in 2000.

      There is no public market for our Class A common stock. As more fully described in the “Limited Market” discussion on page 16 of this Form 10-K, a limited market is maintained by our wholly-owned broker-dealer subsidiary, Bull, Inc., which permits existing stockholders to offer for sale shares of Class A common stock on predetermined days which we call a “trade date.” Generally, there are four trade dates each year. All sales are made at the prevailing price of the Class A common stock determined by the board of directors pursuant to the valuation process described on page 17 of this Form 10-K. If there are insufficient buyers for the stock on any trade date, our stockholders may not be able to sell stock on the trade date. We are authorized but not obligated to purchase shares of Class A common stock in the limited market on any trade date. We cannot assure you that we will continue to make such purchases. Accordingly, if we elect not to participate in a trade or otherwise limit our participation in a trade, our stockholders may be unable to sell all the shares they desire to sell.

      We expect our existing cash, cash equivalents, short-term investments, cash flows from operations and borrowing capacity to provide sufficient funds for our operations, common stock repurchases and capital expenditures. In addition, we expect to finance acquisitions and equity investments in the future with cash from operations and our borrowing capacity.

      Federal legislation has been proposed that, if adopted, would impose new requirements and restrictions on certain types of retirement plans which could impact our stock system and liquidity. One version of the legislation currently under consideration would limit the level of investment a participant could hold in company stock. If legislation of this nature were adopted, it would be likely that purchases of our stock by our retirement plans would decrease and sales increase. If this occurred, the ability of our stockholders to resell their shares in the limited market may be adversely affected. In addition, reduced purchases or increased sales of our stock by the trustees of our retirement plans may adversely impact our liquidity and cash position. Because of the uncertainty of if, when, and in what final form such legislation may be enacted, we are unable to determine the impact this legislation might have on our retirement plans, the operation of our limited market and our liquidity and cash needs.

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Commitments and Contingencies

      As discussed in Note O of the notes to consolidated financial statements, we have two operating leases, which are structured as synthetic leases, on land and buildings where we have a purchase option at the end of the initial lease term. At the end of the initial lease term for each of these operating leases, we will evaluate whether to purchase or extend the lease of the building. If we decide not to renew the leases, both of which expire in August 2003, we would pay $91 million to purchase the buildings. This contingent liability has not been reflected in the consolidated balance sheet pursuant to GAAP, but could affect future cash requirements if we decided to purchase the buildings. In anticipation of refinancing by either renewing these leases or purchasing the land and buildings and to take advantage of the recent favorable interest rate environment, in January 2002, we entered into four forward starting interest rate swap agreements. Using the swap agreements, we are managing our overall related future net cash outflow to be a fixed amount starting in September 2003 through August 2008. In refinancing these leases, we expect to make payments to a third party lessor or third party lender based on a variable interest rate. Under the terms of the swap agreements, we will either pay to or receive an amount from the swap agreements’ counterparty which will effectively make our net cash outflow a fixed amount. These agreements are considered derivative instruments and accounted for under SFAS No. 133 as previously discussed in the Critical Accounting Policies section and Note E of the notes to consolidated financial statements.

      We provide equipment financing for the U.S. Government through an arrangement from an unrelated leasing company in which we lease equipment under an operating lease for use on federal contracts. Because federal contracts are subject to annual renewals, we have the right to terminate these leases with the leasing company should the U.S. Government terminate its contract with us for convenience, non-renewal or lack of funding. If the U.S. Government terminated its contract with us for default or non-performance, we would be liable for the remaining lease payments. The maximum contingent lease liability remaining under these arrangements is $3 million as of January 31, 2002. This contingent liability has not been recorded in the consolidated financial statements pursuant to GAAP.

      We have guaranteed $5 million, which is 50% of a line of credit for our 50% owned joint venture, Data Systems and Solutions, LLC, which we account for using the equity method. In another of our investments in affiliates accounted for using the equity method, we are an investor in Danet Partnership GBR (“GBR”), a German partnership. GBR has an internal equity market similar to our limited market. We are required to provide liquidity rights to the other GBR investors in certain circumstances, namely (i) when there are more sellers than buyers in the internal market and the investor who is selling is withdrawing from GBR or (ii) in the case of a change in control where we become the majority investor of GBR. These rights allow only the withdrawing investors in the absence of a change in control and all GBR investors in the event of a change of control to put their GBR shares to us in exchange for the current fair value of those shares. We may pay the put price in shares of SAIC common stock or cash. We do not currently record a liability for these rights because their exercise is contingent upon the occurrence of future events which we cannot with any certainty determine will occur. The maximum potential obligation, if we assume all the current GBR employees are withdrawing from GBR, would be $23 million as of January 31, 2002. If we were to incur the maximum obligation and purchase all the shares outstanding from the other investors, we would then own 100% of GBR.

      Our Telcordia subsidiary filed a Demand for Arbitration with the International Chamber of Commerce in Paris, France initiating arbitration and seeking damages of approximately $130 million from Telkom South Africa related to a contract dispute. The dispute involves a contract executed on June 24, 1999, pursuant to which Telcordia would provide a Service Activation and Assurance System. The value of Telcordia’s portion of the contracted work was $208 million. Telcordia performed the contract for over 18 months and delivered multiple software releases to Telkom South Africa. On January 12, 2001, Telcordia notified Telkom South Africa that Telkom South Africa had breached the contract for, among other things, taking and using Telcordia software without paying for it, improperly refusing to accept software deliveries, failing to cooperate in defining future software releases, and failing to make other payments due under the contract. On February 2, 2001, Telkom South Africa responded by denying Telcordia’s claims and asserting various breaches on the part of Telcordia. The parties were unable to negotiate a mutually acceptable resolution of the dispute. On March 6, 2001, Telcordia initiated arbitration. On May 22, 2001, Telkom South Africa filed with

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      We are also involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, is expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.

      In response to the Securities and Exchange Commission Financial Reporting Release No. 61, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide the following table which summarizes our contractual obligations and other commercial commitments. For contractual obligations, we included payments that we have a legal and binding obligation to make. For other commercial commitments, we included items where an existing arrangement commits us to a potential payment contingent on an uncertain future event. The future event may or may not occur and, in certain cases, we are not able to determine the likelihood of its occurrence. All the amounts included in the table below are more fully described in Notes I, L, O and P of the notes to consolidated financial statements.

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(1)	Includes interest payments.
(2)	Includes obligations to transfer funds in the future for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices.
(3)	As previously discussed and disclosed in Note O of the notes to consolidated financial statements, the operating leases for certain facilities will terminate in August 2003. While we have not decided whether we would renew the lease or purchase the land and buildings under these leases, for purposes of this table, we have assumed that we will purchase the land and buildings using five-year debt.
(4)	Includes amount of $78 million potentially payable for surety bonds as disclosed in Note P of the notes to consolidated financial statements, $23 million payable to purchase stock of GBR as discussed previously and in Note P of the notes to consolidated financial statements, $4 million payable to those former employees who held shares distributed from our Employee Stock Retirement Plan that bear a limited put option as of January 31, 2002 as more fully discussed in Note I of the notes to consolidated financial statements and $3 million payable on equipment financing for the U.S. Government as previously discussed and in Note O of the notes to consolidated financial statements.

Recently Issued Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for our fiscal year which began February 1, 2002. SFAS No. 144 supercedes and clarifies the accounting in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. Adoption of SFAS No. 144 on February 1, 2002 did not have a material impact on our consolidated financial position or results of operations.

      In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which will be effective for our fiscal year beginning February 1, 2003, and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We do not expect adoption of SFAS No. 143 to have a material impact on our consolidated financial position or results of operations.

      In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the pooling-of-interest method no longer be used. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit. Identifiable intangible assets were amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” through February 1, 2002 when SFAS No. 144 became effective. We adopted SFAS No. 141 and SFAS No. 142 on February 1, 2002, although certain provisions were applied to acquisitions closed subsequent to June 30, 2001. Effective February 1, 2002, we ceased amortizing all goodwill. As of January 31, 2002, we had goodwill of $150 million. Implementing the non-amortization provisions of SFAS 142 for goodwill is expected to result in an increase in operating income of approximately $25 million in 2003. As part of implementing these new statements, we evaluated our current goodwill and intangible assets and reclassified one intangible asset of $1.5 million as goodwill. We did not reclassify any of our previously recorded goodwill as an intangible asset. We completed an evaluation of our goodwill for the transitional goodwill impairment test and determined that we will not have a transitional goodwill impairment charge. In 2002, two small acquisitions with an aggregate purchase price of $1.3 million were completed after June 30, 2001 under the transition rules of SFAS No. 141 and SFAS No. 142.

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Effects of Inflation

      Our cost-reimbursement type contracts are generally completed within one year. As a result, we have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term FFP and T&M type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the period of performance. Consequently, because costs and revenues include an inflationary increase commensurate with the general economy, net income as a percentage of revenues has not been significantly impacted by inflation. As we expand our business into international markets and highly inflationary economies, movements in foreign currency exchange rates may impact our results of operations. Currency exchange rate fluctuations may also affect our competitive position in international markets as a result of their impact on our profitability and the pricing offered to our non-U.S. customers.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

      We are exposed to certain market risks which are inherent in our financial instruments arising from transactions entered into in the normal course of business. Our current market risk exposures are primarily in the interest rate, foreign currency and equity price areas. The following information about our market sensitive financial instruments contains forward-looking statements.

      Interest Rate Risk — Our exposure to market risk for changes in interest rates relates primarily to our investment portfolios, short-term and long-term receivables, interest rate swaps and long-term debt obligations.

      We have established investment policies to protect the safety, liquidity and after-tax yield of invested funds. These policies establish guidelines on acceptable instruments in which to invest and maximum maturity dates. They also require diversification in the investment portfolios by establishing maximum amounts that may be invested in designated instruments. We do not authorize the use of derivative financial instruments in our managed short-term investment portfolios. Our policy requires that all investments mature in four years or less. Strategic investments may have characteristics that differ from those described above.

      We primarily enter into debt obligations to support capital expenditures, working capital needs and merger and acquisition activities.

      As more fully described in Note E of the notes to consolidated financial statements, in certain instances we use interest rate swap agreements to manage future expected cash outflows. Our derivative policies authorize the use of swap agreements to hedge interest rate risks related to payments based on variable interest rates.

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      The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, short-term and long-term receivables and short-term investments, the table presents principal cash flows in U.S. dollars and related weighted average interest rates by expected maturity dates. For the interest rate swap agreements, the table presents the notional amount and weighted-average interest rates by contractual maturity date. The notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts.