Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended January 31, 2003

or

For the transition period from                              to                             

Commission File Number: 0-12771

Science Applications
International Corporation
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code:
(858) 826-6000

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

None

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

Class A Common Stock, Par Value $.01 Per Share
(Title of class)

        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 ý    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. ý

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        As of July 31, 2002, the aggregate value of the voting stock held by non-affiliates of Registrant was $2,890,314,548. For the purpose of this calculation, it is assumed that (i) the Registrant's affiliates include the Registrant's board of directors and certain of the employee benefit plans of the Registrant and its subsidiaries and (ii) the value of the Registrant's Class A common stock as of July 31, 2002 was equal to $28.90, the stock price determined by the stock policy committee of the board of directors on July 29, 2002. The Registrant disclaims the existence of any control relationship between it and such employee benefit plans.

        As of March 31, 2003, there were 185,871,247 shares of Registrant's Class A Common Stock and 235,529 shares of Registrant's Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of Registrant's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K Report.

PART I

Item 1. Business

The Company

        We provide diversified professional and technical services involving the application of scientific, engineering and management 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, analysis 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 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 Agriculture, Department of Commerce, Department of Defense, Department of Energy, Department of Health and Human Services, Department of Homeland Security, 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 2003, 2002 and 2001 were 74%, 68% and 65%, 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 fiscal years 2003, 2002 and 2001, our Telcordia subsidiary made up the Non-Regulated Telecommunications segment. The percentage of our revenues attributable to

2

the Non-Regulated Telecommunications segment for fiscal years 2003, 2002 and 2001 were 18%, 25% and 29%, 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 2003, 2002 and 2001 were 8%, 8% and 7%, respectively. For certain other financial information regarding our reportable segments and geographic areas, see Note B of the notes to consolidated financial statements on page F-13 of this Form 10-K.

        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 and Telcordia Venture Capital Corporation. In February 2000, SAIC Venture Capital Corporation 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 provided 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 have subsequently sold all of our shares of VeriSign and liquidated the equity collar that hedged some of this investment. We no longer hold equity collars or an investment in VeriSign as a result of these transactions.

        We hold 60% of the common stock of a joint venture, Informática, Negocios y Tecnología, S.A., which we call "INTESA." INTESA was formed in January 1997 to provide information technology services in Latin America. INTESA's principal customer and 40% stockholder is the Venezuelan national oil company, Petróleos de Venezuela, S.A., which we call "PDVSA." The basic term of INTESA's services agreement to provide information technology outsourcing services to PDVSA expired on June 30, 2002, but INTESA's services continued under the disentanglement phase of the services agreement. The parties negotiated for a possible renewal of the services agreement or purchase by PDVSA of our interest in INTESA. As of January 31, 2003 and to date, such negotiations have been unsuccessful. The political and economic environment in Venezuela remains very unstable. A general work stoppage in Venezuela has affected the petroleum sector, including PDVSA and INTESA. Due to the suspension of operations, general work force strike and our relationship with PDVSA, the operations of the joint venture are not expected to resume. Until now, we had consolidated our 60% interest in the joint venture, but INTESA is now classified as discontinued operations. We also 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.

Technical Services

        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.

3

National Security

        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.

Health Care

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

Environment

        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.

Energy

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

Telecommunications

        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.

Information Technology

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

Other Technical 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.

4

        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 our internal marketing groups (organized along functional, geographic and other lines) in order to devise and implement, subject to management review and approval, the best means of taking advantage of available business opportunities, including the preparation of proposals responsive to the stated and perceived needs of customers. Our products may be marketed with the assistance of independent sales representatives.

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 2003, 2002 and 2001, approximately 92%, 88% and 85%, 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. Revenues from the U.S. Army represent 11% of consolidated revenues in 2003. No other customer or single contract accounted for 10% or more of consolidated revenues in fiscal years 2003, 2002 and 2001.

        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 2003, 65% in fiscal year 2002 and 62% in fiscal year 2001. No single RBOC accounted for 10% or more of consolidated revenues in fiscal years 2003, 2002 and 2001.

5

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 significant 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 representatives and us. Substantially all of our indirect contract costs have been agreed upon through fiscal year 2001 and are not subject to further adjustment. Contract revenues for fiscal years 2002 and 2003 have been recorded in amounts which are expected to be realized upon final settlement with the U.S. Government. However, no assurance can be given that audits and adjustments for fiscal years 2002 and 2003 will not result in decreased revenues or profits for those years.

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.

        In recent years, the U.S. Government has increasingly used a contracting process called Indefinite Delivery, Indefinite Quantity contracts, known as IDIQ contracts, to obtain contractual commitments from contractors to provide certain products or services at established general terms and conditions. We may compete with multiple contractors for a single IDIQ contract award or in some cases, a single procurement may result in IDIQ contract awards to multiple contractors. At the time of the award of the IDIQ contract, the U.S. Government generally commits to purchase only a minimum amount of products or services from the contractor to whom the IDIQ contract was awarded. After award of the IDIQ contract, the U.S. Government may issue task orders for specific services or products it needs.

6

The contractor provides such products or services in accordance with the pre-established terms and conditions. IDIQ contracts frequently have multi-year terms and unfunded ceiling amounts which enable, but do not commit, the U.S. Government to purchase substantial amounts of products and services from the contractor. The U.S. Government's use of IDIQ contracts makes it more difficult for a contractor to estimate the actual value of products or services to be ultimately awarded under a given contract.

        During fiscal years 2003, 2002 and 2001, approximately 52%, 51% and 51%, respectively, of the Regulated segment revenues were derived from cost-reimbursement contracts and approximately 15%, 16% and 15%, 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 2003, 2002 and 2001, approximately 82%, 82% and 80%, respectively, of the Non-Regulated Telecommunications segment revenues were from firm fixed-price contracts and approximately 15%, 17% and 19%, 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 2003, 2002 and 2001, approximately 56%, 46% and 36%, respectively, of the Non-Regulated Other segment revenues were derived from target cost and fee with risk sharing contracts and approximately 28%, 44% and 41%, 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 on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract, and for which formal contracts or contract modifications have not been executed 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, 2003 and 2002 were $49,247,000 and $44,299,000, respectively, for the Regulated segment; $698,000 and $446,000, respectively, for the Non-Regulated Telecommunications segment; and $305,000 and $605,000, 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.

        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.

7

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, 2003 and 2002 for the Regulated segment was approximately $2,499,000,000 and $1,960,000,000, respectively, for the Non-Regulated Telecommunications segment it was approximately $921,000,000 and $1,861,000,000, respectively, and for the Non-Regulated Other segment it was approximately $232,000,000 and $284,000,000, respectively. We expect that a substantial portion of our backlog at January 31, 2003 will be recognized as revenues prior to January 31, 2004. Some contracts associated with the backlog are incrementally funded and may continue for more than one year.

Employees and Consultants

        As of January 31, 2003, we employed approximately 38,700 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.

Company Website and Information

        Our website can be found on the Internet at www.saic.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC by accessing our website at www.saic.com and clicking on Company Overview and then clicking on SEC's EDGAR database or by accessing our intranet http://issaic.saic.com/ and clicking on EON and then clicking on EO Library and then SEC Filings.

        Our annual report on Form 10-K and prospectus and summary plan descriptions are also provided to each employee and consultant eligible to purchase SAIC Class A common stock when they begin working for SAIC. Any of the above documents, and any of our reports on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports, can also be obtained in print by any stockholder who requests them. Request for copies should be directed to:

Science Applications International Corporation
10260 Campus Point Drive
San Diego, CA 92121
Attention: Corporate Secretary
Telephone: (858) 826-7323

8

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

A substantial percentage of our revenue is from U.S. Government customers and the regional Bell operating companies

        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 69% in fiscal year 2003, 61% in fiscal year 2002 and 56% in fiscal year 2001. In addition, revenues from the U.S. Army represent 11% of consolidated revenues in fiscal year 2003. 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. The current Iraq conflict may adversely impact our revenues in fiscal year 2004 if U.S. Government funding shifts to direct war fighting efforts, as we may experience delays in new contract awards and funding of current contracts that are not directly related to the conflict. 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 2003, 65% in fiscal year 2002 and 62% in fiscal year 2001. With the downturn in the telecommunications industry, Telcordia's business is more dependent on its business from the RBOCs and it continues efforts to diversify its business by obtaining new customers. As a result of the changes and continuing decline in the marketplace, Telcordia's customers, particularly the RBOCs, continue to reduce their contract spending and place pressure on Telcordia to reduce prices and accept less favorable terms on existing and future contracts. Telcordia continues to seek opportunities for growth through the introduction of new products and diversification into new markets and with new customers. A continued downturn in the telecommunications industry and loss of business from the RBOCs or other commercial customers 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.

If we fail to control fixed-price or target cost and fee with risk sharing contracts, it may result in reduced profits or losses

        The percentage of our Regulated segment revenues from firm fixed-price contracts was 15% for fiscal year 2003, 16% for fiscal year 2002 and 15% for fiscal year 2001. The percentage of our Non-Regulated Telecommunications segment revenues from firm fixed-price contracts was 82% for fiscal year 2003, 82% for fiscal year 2002 and 80% for fiscal year 2001. 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.

9

        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 2003, 2002 and 2001, approximately 56%, 46% and 36%, 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.

Our business could suffer if we lose the services of Dr. Beyster or other key personnel

        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 78). 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 our 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.

We face risks relating to Government contracts

        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 2001 and are not subject to further adjustment. We have recorded contract revenues in fiscal years 2002 and 2003 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.

If we fail to recover pre-contract costs, it may result in reduced profits or losses

        Any costs that we incur on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract and for which formal contracts or contract modifications have not been executed are incurred at our risk, and it is possible that the customer will not reimburse us for these pre-contract costs. At January 31, 2003, we had pre-contract costs of $49,247,000 in the Regulated segment, $698,000 in the Non-Regulated Telecommunications segment and $305,000 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.

10

If we fail to execute our acquisitions or investments, our business could suffer

        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 acquisitions and investments pose 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

We face risks associated with our international business

        Our international business operations are subject to a variety of the risks associated with 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 our participation in entities such as INTESA, a Venezuelan joint venture in which we own a 60% interest. INTESA has derived substantially all its revenues from an outsourcing services agreement with PDVSA, the joint venture's primary customer and other partner. The basic term of the services agreement expired on June 30, 2002 but INTESA's services continued pursuant to the disentanglement phase of the services agreement. The parties negotiated for a possible renewal of the services agreement or purchase by PDVSA of SAIC's interest in INTESA, but as of January 31, 2003, no agreement has been reached. The political and economic environment in Venezuela remains very unstable. A general work stoppage in Venezuela has affected the petroleum sector, including PDVSA and INTESA. INTESA declared force majeure under the services agreement which would excuse any non-performance attributable to the force majeure events and notified PDVSA that the agreement had terminated for PDVSA's failure to make payments and other reasons. PDVSA contends that INTESA failed to perform its obligations under the services agreement. In addition, the Attorney General of Venezuela initiated a criminal investigation of INTESA alleging unspecified sabotage by INTESA employees. In January 1997 when the joint venture was formed, we guaranteed INTESA's obligations under the services agreement to PDVSA. Due to the suspension of operations, general work force strike and our relationship with PDVSA, the operations of the joint venture are not expected to resume. Until now, we had consolidated our 60% interest in the joint venture, but INTESA is now classified as discontinued operations. Due to the complex nature of the legal and factual issues involved in this matter and the uncertain economic and political environment in Venezuela, the outcome is not presently determinable; however, an adverse resolution could materially harm our

11

business, consolidated financial position, results of operations and cash flows. For further discussion of our participation in INTESA, see "Management Discussion & Analysis—Discontinued Operations" and "Commitments and Contingencies" on pages 29 and 40 of this Form 10-K and Note V of the notes to the consolidated financial statements on page F-41 of this Form 10-K.

        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 foreign currency forward exchange 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.

Unsuccessful resolution of the Telkom South Africa Arbitration could harm our business

        As previously disclosed in our filings with the SEC, our Telcordia subsidiary instituted arbitration proceedings against Telkom South Africa as a result of a contract dispute. Telcordia is seeking to recover damages of approximately $130,000,000, plus interest at a rate of 15.5%. Telkom South Africa counterclaimed, seeking substantial damages from Telcordia, including repayment of approximately $97,000,000 previously paid to Telcordia under the contract and the excess costs of reprocuring a replacement system, estimated by Telkom South Africa to be $234,000,000. In a Partial Award dated as of September 27, 2002, the arbitrator dismissed the counterclaims of Telkom South Africa and found that Telkom South Africa repudiated the contract. Telcordia initiated proceedings in the U.S. to confirm the Partial Arbitral Award. Meanwhile, Telkom South Africa has requested that the South African High Court set aside the Partial Award, dismiss the Arbitrator and the International Court of Arbitration, and submit the dispute to a new arbitration panel in South Africa. Although Telcordia believes Telkom South Africa's application is without merit and constitutes an abuse of process, no assurance can be given that the High Court will not consider Telkom South Africa's petition, or provide all or some portion of the relief requested. Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcome of the arbitration and the related court actions are not presently determinable; however, an adverse resolution could materially harm our business, consolidated financial position, results of operations and cash flows. Protracted litigation, regardless of outcome, could result in substantial costs and divert management's attention and resources. For more discussion of this dispute, see "Legal Proceedings" on page 16 of this Form 10-K and Note Q of the notes to the consolidated financial statements on page F-37 of this Form 10-K.

Unfavorable economic conditions could harm our business

        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

Our business could suffer if we fail to attract, train and retain skilled employees

        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

12

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 failure to remain competitive could harm our business

        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 name recognition, 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 remain competitive, we must provide superior service and performance on a cost-effective basis to our customers.

Risks Relating to Our Stock

Because no public market exists for our stock, the ability of stockholders to sell their SAIC stock is limited

        There is no public market for our 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. In fact, the trade originally scheduled for July 26, 2002 was postponed to August 16, 2002 in order to establish a new stock price after it was determined that the stock price set by the board of directors on July 12, 2002 no longer represented a fair market value.

If a trade in the limited market is undersubscribed, our stockholders may not be able to sell all the shares they desire to sell

        If the number of shares offered for sale by stockholders exceeds the number of shares sought to be purchased by authorized buyers in any trade, our stockholders who requested to sell shares may not be able to sell all such shares in that trade. We are currently authorized, but not obligated to purchase shares of Class A common stock in the limited market on any trade date. In deciding whether to make such purchases, 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 limited market. The final determination is not made before the trade date. We have purchased a significant amount of Class A common stock in the limited market during recent periods. We purchased a total of 16,238,751 shares on the trade dates in fiscal year 2003 and a total of 14,028,781 shares on the trade dates in fiscal year 2002. These purchases accounted for 84.5% and 88.2%, respectively, of the total shares purchased by all buyers in the limited market during fiscal years 2003 and 2002. Our purchases balanced the number of shares offered for sale by stockholders with the number of shares sought to be purchased by authorized buyers. If the increasing trend of trade imbalances continues, we cannot assure you that we will continue to purchase such excess shares in the future. Accordingly, if the aggregate number of shares offered for sale exceeds the aggregate number of shares sought to be purchased by authorized buyers, and 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 in the limited market. Because no other market exists for our stock, our stockholders may be unable to sell all the shares they desire to sell.

        During the 2003 and 2002 fiscal years, the trustees of certain of our retirement and benefit plans purchased an aggregate of 1,998,956 and 1,450,018 shares, respectively, in the limited market. These purchases accounted for approximately 10.4% and 9.1% of the total shares purchased by all buyers in

13

the limited market during fiscal years 2003 and 2002, 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.

        To the extent that purchases by the trustees of our retirement and benefit plans decrease, and purchases by us decrease or do not increase, 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.

The ability of stockholders to sell or transfer their common stock outside the limited market is restricted

        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

        We may, but are not obligated to defer our repurchase rights with respect to those employees who qualify for our Alumni Program or Former Employee Program.

Our stock price and the price at which all trades in the limited market occur is determined by our board of directors and is not established by market forces

        Our stock price is not determined by a trading market of bargaining buyers and sellers. Our board of directors, all 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." The stock price remains in effect until subsequently changed. The board of directors has authorized its stock policy committee to review the stock price during the period between regularly scheduled 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. In some quarters, the full board of directors conducts this review. If a stock price modification is necessary, the stock policy committee or board of directors would apply the same valuation process used by the board of directors. The stock policy committee modified the stock price on July 29, 2002 after it was determined that the stock price established by the board of directors on July 12, 2002 no longer represented a fair market value. All trades in the limited market will occur at the stock price determined by the board of directors or its stock policy committee. 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, 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.

Future returns on our common stock may be significantly lower than historical returns

        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. In fact, the price declined 13.2% during fiscal year 2003.

14

Changes in our business and the volatility of the market value of our comparable companies may increase the volatility of the stock price

        The stock price could be subject to fluctuations in the future. This volatility may 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

•

the impact of acquisitions, investments, joint ventures and divestitures that we may undertake

•

the impact of the volatility of the market value of comparable public companies that are considered in our valuation process

•

the impact of the independent appraiser's consideration in its valuation of the trend of increasing limited market trade imbalances and our inability to guarantee 100% liquidity in the quarterly trades, regardless of the amount of the undersubscription

Restrictions in our certificate of incorporation and bylaws may discourage takeover attempts that you might find attractive

        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.

Forward-Looking Statement Risks

You may not be able to rely on forward-looking statements

        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, 2003, we conducted our operations in more than 400 offices located in 42 states, the District of Columbia and various foreign countries. We occupy a total of approximately 10,300,000 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, 2,600,000 square feet and 1,100,000 square feet of space, respectively.

15

        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, two buildings totaling 159,200 square feet on approximately 22.5 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 P of the notes to consolidated financial statements on page F-36 of this Form 10-K for information regarding commitments under leases.

Item 3. Legal Proceedings

        As previously disclosed in our filings with the SEC, our Telcordia subsidiary instituted arbitration proceedings against Telkom South Africa as a result of a contract dispute. Telcordia is seeking to recover damages of approximately $130,000,000, plus interest at a rate of 15.5%. Telkom South Africa counterclaimed, seeking substantial damages from Telcordia, including repayment of approximately $97,000,000 previously paid to Telcordia under the contract and the excess costs of reprocuring a replacement system, estimated by Telkom South Africa to be $234,000,000. In a Partial Award dated as of September 27, 2002, the arbitrator dismissed the counterclaims of Telkom South Africa and found that Telkom South Africa repudiated the contract. Telcordia initiated proceedings in the U.S. to confirm the Partial Arbitral Award. Meanwhile, Telkom South Africa has requested that the South African High Court set aside the Partial Award, dismiss the Arbitrator and the International Court of Arbitration, and submit the dispute to a new arbitration panel in South Africa. Although Telcordia believes Telkom South Africa's application is without merit and constitutes an abuse of process, no assurance can be given that the High Court will not consider Telkom South Africa's petition, or provide all or some portion of the relief requested. Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcome of the arbitration and the related court actions are not presently determinable; however an adverse resolution could materially harm our business, consolidated financial position, results of operations and cash flows. Protracted litigation,

16

regardless of outcome, could result in substantial costs and divert management's attention and resources.

        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 2003 Annual Meeting of Stockholders (the "2003 Proxy Statement").

        The following is a list of the names and ages (as of March 31, 2003) 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.

17

18

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 some 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, however, a scheduled trade date could be postponed or cancelled. In fact, the trade originally scheduled for July 26, 2002 was postponed to August 16, 2002 in order to establish a new stock price after it was determined that the stock price set by the board of directors on July 12, 2002 no longer represented a fair market value. A trade date typically occurs one week 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 and purchases are made at the prevailing price of the Class A common stock determined by the board of directors or its stock policy committee pursuant to the valuation process described below. All participants who wish to participate in a particular trade must submit a trade request in the form of a limit order. A limit order is a request to buy stock at any price equal to or below the limit price specified by the person placing the order or a request to sell stock at any price equal to or above the limit price specified. A limit order will not be processed if the limit price is not satisfied by the price established by the board of directors unless the order is modified. A participant may not submit both a buy limit order and a sell limit order on the same account for the same trade.

        Trade participants may submit their limit order requests either online or in paper format. In order to participate in a particular trade, the participant's limit order must be received by Bull, Inc. no later than 5 p.m. Pacific Time on the day before the board of directors meeting at which the price of the Class A common stock is determined which we refer to as the "limit order deadline." After the stock price has been determined, participants can cancel their orders prior to 5 p.m. Pacific Time on the Friday one week after the stock price is determined which we refer to as the "trade modification deadline." In addition, those participants who submitted their orders online may modify their orders prior to the trade modification deadline. Participants who submitted their order by paper may not modify their orders once submitted, other than to cancel their order. Participants may not change a buy order to a sell order, or a sell order to a buy order after the limit order deadline. All sellers in the limited market (other than our retirement plans and us) pay Bull, Inc. a sales commission. Stockholders submitting sales orders online pay a commission currently equal to 0.5% of the proceeds from such sales and stockholders submitting sales orders by paper pay 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.

19

        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 Class A common stock for each proposed seller, then the purchase orders will be allocated equally among all of the proposed sellers up to the total number of shares offered for sale.

        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. In deciding whether to make such purchases, 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. The final determination is not made before the trade date. We have purchased a significant amount of Class A common stock in the limited market during recent periods. We purchased a total of 16,238,751 shares on the trade dates in fiscal year 2003 and a total of 14,028,781 shares on the trade dates in fiscal year 2002. These purchases accounted for 84.5% and 88.2%, respectively, of the total shares purchased by all buyers in the limited market during fiscal years 2003 and 2002. Our purchases balanced the number of shares offered for sale by stockholders with the number of shares sought to be purchased by authorized buyers. If the increasing trend of trade imbalances continues, we cannot assure you that we will continue to purchase such excess shares in the future. Accordingly, if the aggregate number of shares offered for sale exceeds the aggregate number of shares sought to be purchased by authorized buyers, and 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 in the limited market. Because no other market exists for our stock, our stockholders may be unable to sell all the shares they desire to sell.

        During the 2003 and 2002 fiscal years, the trustees of certain of our retirement and benefit plans purchased an aggregate of 1,998,956 and 1,450,018 shares, respectively, in the limited market. These purchases accounted for approximately 10.4% and 9.1% of the total shares purchased by all buyers in the limited market during fiscal years 2003 and 2002, 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.

        To the extent that purchases by the trustees of our retirement and benefit plans decrease, and purchases by us decrease or do not increase, 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. 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 limited market. The final determination is not made before the trade date. In fiscal years 2003 and 2002, 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

20

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. These meetings are currently scheduled in January, April, July and October of each year and are held approximately one week before the four predetermined trade dates. The board of directors has authorized its stock policy committee to review the stock price during the period between regularly scheduled 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. In some quarters, the full board of directors conducts this review. If a stock price modification is necessary, the stock policy committee or board of directors would apply the same valuation process used by the board of directors. The stock policy committee modified the stock price on July 29, 2002 after it was determined that the stock price established by the board of directors on July 12, 2002 no longer represented a fair market value. 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 or its stock policy committee. Our certificate of incorporation provides that the price of the Class B common stock is equal to 20 times the stock price applicable to the Class A common stock.

        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:

21

        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.

        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

        Although the orders to buy or sell shares of Class A common stock in the limited market must be entered prior to a price determination, this information is not made available to the board of directors and is not a consideration in determining the price.

22

        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 or its stock policy committee. 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



•

the impact of acquisitions, investments, joint ventures and divestitures that we may undertake



•

the impact of the volatility of the market value of comparable public companies that are considered in our valuation process



•

the impact of the independent appraiser's consideration in its valuation of the trend of increasing limited market trade imbalances and our inability to guarantee 100% liquidity in the quarterly trades, regardless of the amount of the undersubscription

Stock Price Tables

        The following tables set forth information concerning the stock 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 adjusted stockholders' equity and "P" or adjusted 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 April 2001 trade table is based on the definitions of the formula then in effect. The Class A common stock has been rounded to the nearest penny. There can be no assurance that the Class A common stock or the Class B common stock will in the future provide returns comparable to historical returns or that the price will not decline. In fact, the price declined 13.2% during fiscal year 2003. See "Business—Risk Factors—Future returns on our common stock may be significantly lower than historical returns."

(1)

"E" 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" 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" 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,

23

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" 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 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 valuation.

(1)

"E" 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" 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" is our net income for the four fiscal quarters immediately preceding the price determination.

(4)

"W" 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.

Holders of Class A Common Stock and Class B Common Stock

        As of March 31, 2003, there were 31,351 holders of record of Class A common stock and 177 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 or beneficially 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 currently 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.

24

Item 6. Selected Financial Data

        The following data has been derived from the consolidated financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."

(1)

Operations of INTESA are classified as discontinued operations and all prior period income statement and balance sheet information presented has been conformed to this presentation.

(2)

Includes gain on sale of subsidiary stock of $698 million in 2000. Through fiscal year 2000, NSI was a consolidated subsidiary. Beginning in fiscal 2001, NSI was no longer consolidated in our operating results.

(3)

Includes impairment losses of $108 million, $467 million and $1.4 billion on marketable equity securities and other private investments in 2003, 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.

25

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

        We provide diversified professional and technical services involving the application of scientific, engineering and management 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 provider of software, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry. We also design and develop high-technology products that include customized and standard hardware and software, such as automatic equipment identification technology, sensors and nondestructive imaging and security instruments.

        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; the risks associated with our international business such as INTESA; the adverse impact the Iraq conflict may have on our revenues in 2004; 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 9.

        Unless otherwise noted, references to the years are for fiscal years ending January 31, not calendar years.

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

26

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 discussed in Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Under the percentage-of-completion method, revenues are recognized based on progress towards completion, 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 judgments 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 and private equity 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, we record the difference between cost and market value as a realized loss. As of January 31, 2003, we held $20 million in marketable equity and debt securities subject to changes in fair value. Similarly, other private equity investments accounted for on the cost method or equity method must be marked down to estimated fair value if an other-than-temporary decline occurs. As of January 31, 2003, we held $108 million in private equity investments. In determining whether a decline is other-than-temporary, management considers a wide range of factors that may vary depending upon whether the investment is a publicly held equity security or a private investment. These factors include the period of time that the market value of the security or investment has been below its cost, recent financing rounds at a value that is below our carrying value, the operating performance of the entity, its liquidity and our investment intent. The private equity investments involve more judgment than the marketable equity securities because there is no readily available fair market value of a private equity security. Therefore, management, in addition to considering a wide range of other factors, must also use valuation methods to estimate the fair value of a private equity investment. Management judgments about these factors may impact the timing of when an other-than-temporary loss is recognized, and management's use of valuation methods to estimate fair value may also impact the amount of the impairment loss.

•

Derivative instruments—As discussed in Note H 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. In some cases, 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,

27

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.

•

Goodwill Impairment—As discussed in Note A and Note G of the notes to consolidated financial statements, we account for our goodwill, which represents 11% of our consolidated long-term assets and 3% of consolidated total assets, under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changed the accounting for goodwill from an amortization approach to an impairment-only approach. Goodwill is tested annually at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The goodwill impairment test is a two-step process which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each of the reporting units based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit's assets and liabilities from its estimated fair value which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting units' goodwill over the implied fair value of their goodwill. The revenue and profit forecasts used in step one are based on management's best estimate of future revenues and operating costs. Changes in these forecasts could cause a particular reporting unit to either pass or fail the first step in the impairment test, which could significantly change the amount of the impairment recorded from step two. In addition, the estimated future cash flows are adjusted to present value by applying a discount rate. Changes in the discount rate impact the impairment by affecting the calculation of the fair value of the reporting unit in step one.

•

Pension and other postretirement benefit plans—As discussed in Note K of the notes to consolidated financial statements, we provide retiree benefits under defined benefit pension plans for employees of Telcordia and certain employees in the United Kingdom that are accounted for under SFAS No. 87, "Employers' Accounting for Pensions." We also provide retiree medical benefits at Telcordia under a plan that is accounted for under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The cost of providing these benefits is recognized over the period the employee is working and requires actuarial calculations in determining the amount of expense to recognize. The actuarial calculations involve significant assumptions about a number of factors including the expected cost of the benefits and the expected return on the plan assets, if any. Note K 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 the 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.

Due to the downturn in the equity markets, we have experienced declines in the fair value of the pension assets in Telcordia's plan and our foreign pension plan in the United Kingdom. As a result, at January 31, 2003, the accumulated benefit obligation for our foreign pension plan was

28

greater than the fair value of the pension assets, which means the pension plan is underfunded. Therefore, we recognized an additional minimum pension liability of $13 million and an after-tax non-cash reduction to stockholders' equity and other comprehensive income of $10 million on our foreign pension plan. With respect to the Telcordia pension plan, it currently is not in an underfunded position. However, if the equity markets continue to decline and other key actuarial assumptions change such that our Telcordia pension plan is in an underfunded position at the end of 2004, then we would recognize an additional minimum pension liability and reduction to stockholders' equity. We would, however, have an opportunity to make contributions to the pension plan which would eliminate the underfunded position. Whether management would make contributions would depend on several factors, including the amount of the funding shortfall. Based on the balance of Telcordia's prepaid pension asset at January 31, 2003, if the Telcordia plan was in an underfunded position, we would record an additional minimum liability of $558 million plus the underfunded amount. The after-tax non-cash reduction to stockholders' equity and other comprehensive income would be $332 million plus the after-tax effect of the underfunded amount.

In conjunction with management's 2003 update of the assumptions used in the actuarial valuations that are performed on the Plans' measurement dates, we lowered the discount rate to 6.5%, which is used to value the future pension obligation, and we maintained the rate of return on assets assumption at 8.0%. As a result of reducing the discount rate and the decline in fair value of pension assets, we will record a higher pension expense in 2004. In addition, in accordance with SFAS No. 87, we have unrecognized actuarial losses which may result in higher pension expense.

Discontinued Operations

        In January 1997, we formed a foreign joint venture, INTESA, with Venezuela's national oil company, PDVSA, to provide information technology services in Latin America. Since the formation of INTESA, we have held a 60% majority ownership in the joint venture with the remaining 40% owned by PDVSA. INTESA has derived substantially all its revenues from an outsourcing services agreement with PDVSA, the joint venture's primary customer and other partner. The basic term of the services agreement expired on June 30, 2002, but INTESA's services continued pursuant to the disentanglement phase of the services agreement. The parties negotiated for a possible renewal of the services agreement or purchase by PDVSA of SAIC's interest in INTESA, but as of January 31, 2003, no agreement has been reached. The political and economic environment in Venezuela remains very unstable. A general work stoppage in Venezuela has affected the petroleum sector, including PDVSA and INTESA. INTESA declared force majeure under the services agreement which would excuse any non-performance attributable to the force majeure events and notified PDVSA that the agreement had terminated for PDVSA's failure to make payments and other reasons. PDVSA contends that INTESA failed to perform its obligations under the services agreement. In addition, the Attorney General of Venezuela initiated a criminal investigation of INTESA alleging unspecified sabotage by INTESA employees. Due to the complex nature of the legal and factual issues involved in this matter and the uncertain economic and political environment in Venezuela, the outcome is not presently determinable.

        Due to the suspension of operations, general work force strike and the relationship with PDVSA, the operations of the joint venture are not expected to resume. Therefore, INTESA has been classified as discontinued operations. INTESA's revenues of $215 million, $323 million and $291 million for 2003, 2002 and 2001, respectively, were part of the Non-Regulated Other segment and had represented 32%, 41% and 44% of Non-Regulated Other segment revenues for the respective years. An estimated loss of $7 million from a write-down of our investment in INTESA to its fair value was included in "(Loss) gain on discontinued operations" for 2003. The effect of INTESA's income before income taxes, net of the loss on investment, was $3 million, $12 million and $5 million for the years ended 2003, 2002 and 2001, respectively, and is reflected in "(Loss) gain on discontinued operations" in the consolidated

29

statements of income, net of related taxes of $3 million, $5 million and $936 thousand for the respective years. Net assets of INTESA's discontinued operations are not significant.

Results of Continuing 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, net" in our consolidated statements of income but do not consolidate the affiliates' assets and liabilities. The amount of revenues we have 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 F of the notes to consolidated financial statements.

        The following discussion and analysis of financial condition and results of operations focuses on our continuing operations, therefore, amounts related to INTESA have been reclassified as discontinued operations for all periods presented to conform to our 2003 presentation.

Revenues

        Our revenues increased 2% in 2003 and 3% in 2002. We experienced growth of 12% in 2003 and 7% in 2002 from our U.S. Government customers. Revenues from our telecommunications commercial customers decreased in 2003 and 2002 as the telecommunications industry continued its decline. Revenues from our non-telecommunications commercial customers decreased in 2003 primarily due to challenging economic conditions facing our customers, largely in the energy industry, but increased in 2002 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 the regulatory environment governing our services. Groups in the Regulated segment provide technical services and products primarily for departments and agencies of the U.S. Government through contractual arrangements as either a prime contractor or subcontractor to other contractors. 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 2003, 2002 and 2001, our Telcordia subsidiary made up the Non-Regulated Telecommunications segment.

        Regulated segment revenues as a percentage of consolidated revenues were 74%, 68% and 65% in 2003, 2002 and 2001, respectively, and on an absolute basis, increased 12% in 2003 and 7% in 2002. The growth in Regulated segment revenues on an absolute basis in 2003 was a result of growth in our traditional business areas with departments and agencies of the U.S. Government. The lower growth rate in 2002 was because we made fewer acquisitions in this segment than in prior years. 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. The current Iraq conflict may adversely impact our revenues in 2004 if U.S. Government funding shifts to direct war fighting efforts, as we may experience delays in new contract awards and funding of current contracts

30

that are not directly related to the conflict. In general, obtaining U.S. Government contracts remains a highly competitive process. We continue to increase revenues with the U.S. Government in the service type contracts which are competitively priced utilizing lower cost structures. This constant growth 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 18%, 25% and 29% in 2003, 2002 and 2001, respectively, and on an absolute basis, decreased 25% in 2003 and 10% in 2002. The decreases in 2003 and 2002 were directly attributable to the downturn in the global telecommunications market which adversely affected Telcordia's revenues. Telcordia historically has derived a majority of its revenues from the RBOCs. As a result of the changes and continuing decline in the marketplace, Telcordia's customers, particularly the RBOCs, continue to reduce their contract spending and place pressure on Telcordia to reduce prices and accept less favorable terms on existing and future contracts. Significant contracts with the RBOCs for maintenance and enhancement support expire in December 2003 and a decline in prices could impact Telcordia's revenues going forward. Telcordia is focused on opportunities for growth through the introduction of new products and diversification into new customers and markets. However, loss of business from the RBOCs or other commercial customers as the global telecommunications market continues to decline could further reduce revenues and have a continued adverse impact on our business.

        Non-Regulated Other segment revenues as a percentage of consolidated revenues were 8% in each of 2003 and 2002 and 7% in 2001. On an absolute basis, Non-Regulated Other segment revenues decreased 3% in 2003 and increased 24% in 2002. The decrease in 2003 is due to reductions in work for our commercial IT outsourcing customers, largely in the energy industry, who are experiencing a challenging economic environment which is causing them to reduce contract spending. This difficult economic environment has continued into 2004. The increase in segment revenues as a percentage of consolidated revenues and on an absolute basis in 2002 was primarily due to new contracts with these same customers in the energy industry in the United States and United Kingdom.

        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 2003, we had approximately 38,700 full-time and part-time employees compared to 38,000 and 39,200 at the end of 2002 and 2001, respectively. Material and subcontract ("M&S") revenues were $1.5 billion in 2003, $1.3 billion in 2002 and $1.1 billion in 2001. M&S revenues as a percentage of consolidated revenues increased to 26% in 2003 from 23% in 2002.

        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 and increased as a percentage of revenues in 2003 in certain areas of our U.S. Government business and in certain of our commercial contracts. Target cost and fee with

31

risk sharing contracts provide for the customer to 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. Our commercial information technology outsourcing business frequently contracts on this basis. Time-and-materials ("T&M") contracts typically provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable direct costs at actual cost plus allocable indirect costs. Fixed-price level-of-effort ("FP-LOE") contracts are similar to T&M contracts since ultimately revenues are based upon the labor hours provided to the customer. Firm fixed-price ("FFP") contracts require us to provide stipulated products, systems or services for a fixed price. We assume greater performance risk on FFP contracts and our 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 particular contracts.

        The growth of our business is directly related to the receipt of contract awards and contract performance. We performed on 910 contracts with annual revenues greater than $1 million in 2003 compared to 961 and 851 such contracts in 2002 and 2001, respectively. These larger contracts represented 79% of our revenues in 2003, 73% in 2002 and 69% in 2001. Of these contracts, 81 contracts had individual revenues greater than $10 million in 2003 compared to 78 such contracts in 2002 and 76 in 2001. 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

        Cost of revenues as a percentage of revenues was 81.6% in 2003, 79.9% in 2002 and 78.3% in 2001. The increase in 2003 is primarily attributable to changes in relative revenues among our three business segments. Our revenues from our commercial customers have more of their associated costs in selling, general and administrative ("SG&A") as opposed to cost of revenues. Therefore, the lower relative revenues in our Non-Regulated Telecommunications and Non-Regulated Other segments in 2003 caused the overall cost of revenues to increase as a percentage of revenues. The increase in 2002 was primarily attributable to overruns on certain FFP contracts in the Regulated segment and the lower revenues at Telcordia. Regulated segment cost of revenues as a percentage of its revenues was 87.3%, 87.8% and 86.5% in 2003, 2002 and 2001, respectively. The higher cost of revenues percentage in 2003 and 2002 was primarily attributable to FFP losses on certain contracts. Non-Regulated Telecommunications cost of revenues as a percentage of its revenues was 57.3%, 57.4% and 58.4% in 2003, 2002 and 2001, respectively. Non-Regulated Other segment cost of revenues as a percentage of its revenues was 76.0%, 75.6% and 78.5% in 2003, 2002 and 2001, respectively.

Selling, General and Administrative Expenses ("SG&A")

        SG&A expenses are comprised of general and administrative ("G&A"), bid and proposal and independent research and development ("IR&D") expenses. SG&A expenses as a percentage of consolidated revenues were 9.8%, 12.7% and 14.7% in 2003, 2002 and 2001, respectively. The overall decrease in SG&A in 2003 and 2002 was primarily attributable to our Non-Regulated Telecommunications segment.

        SG&A as a percentage of revenues in the Regulated segment was 5.2%, 5.7% and 6.2% in 2003, 2002 and 2001, respectively. While our revenues have grown in this segment in 2003 and 2002, we have been able to maintain our administrative infrastructure without corresponding increases in administrative costs to support such growth. Therefore, the decrease in the Regulated segment's SG&A in 2003 and 2002 is primarily attributable to economies of scale and close monitoring of our SG&A costs. The lower SG&A expense as a percentage of revenues in the Regulated segment also contributed to the improved segment operating income as discussed below.

32

        SG&A as a percentage of revenues in the Non-Regulated Telecommunications segment was 26.2%, 30.1% and 29.7% in 2003, 2002 and 2001, respectively. The decrease in 2003 is a result of the involuntary workforce reductions, restructuring and cost control efforts that began at Telcordia in 2002 in response to the downturn in the telecommunications industry. SG&A as a percentage of Non-Regulated Telecommunications revenues in 2002 increased slightly over 2001 because of the restructuring costs in the second half of 2002. Although revenues decreased in this segment, the decrease in SG&A expenses contributed to an increase in segment operating income as discussed below.

        SG&A as a percentage of revenues in the Non-Regulated Other segment was 16.3%, 14.5% and 25.6% in 2003, 2002 and 2001, respectively, and increased in 2003 as a percentage of revenues because SG&A costs did not decrease in proportion to the decrease in revenues from our commercial IT outsourcing contracts. In addition, we recognized higher pension expense on our foreign pension plan in the United Kingdom. The decrease in 2002 is primarily attributable to decreased G&A, marketing and IR&D spending resulting primarily from the sale of two business units in 2001 that had high SG&A costs as a percentage of revenues.

Segment Operating Income

        Consolidated segment operating income, as defined in Note B of the notes to consolidated financial statements, as a percentage of consolidated revenues was 8.6%, 7.5% and 7.0% for 2003, 2002 and 2001, respectively, and increased 18% in 2003 and 9% in 2002.

        Regulated segment operating income as a percentage of its revenues was 7.5% in 2003, 6.6% in 2002 and 7.4% in 2001 and increased 27% in 2003 and decreased 4% in 2002. The increase in 2003 reflects overall improved operating performance and lower SG&A expenses. The decrease in 2002 was primarily attributable to greater overruns on certain FFP contracts than experienced in 2001.

        Our Non-Regulated Telecommunications segment operating income as a percentage of its revenues was 18.5% in 2003, 13.2% in 2002 and 12.0% in 2001 and increased 6% in 2003 and decreased 2% in 2002. The increase in 2003 was due to aggressive cost reductions actions taken in the second half of 2002 and throughout 2003. Telcordia had involuntary workforce reductions of 686 employees in 2003 compared to 2,100 employees and 650 contractors in 2002 to realign its staffing levels to the reduction in market demand. We recorded restructuring charges of $15 million in 2003 and $85 million in 2002 for the workforce reductions of which $13 million in 2003 and $59 million in 2002 has been reflected in cost of revenues with the remaining balances in SG&A expenses. Workforce reduction costs in 2003 and 2002 consisted of special termination pension benefits of $13 million and $62 million, respectively, as well as outplacement services, extension of medical benefits, or other severance benefits and costs related to closing facilities of $2 million in 2003 and $23 million in 2002. 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. At February 1, 2002, accrued liabilities related to severance costs were $7 million. During 2003, we accrued an additional $2 million of other severance benefits and facilities closure costs and paid out $8 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 $1 million as of January 31, 2003. In 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 to an appropriate level, 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

33

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 7.7% and 10.8% in 2003 and 2002, respectively, and decreased 30% in 2003 and increased 524% in 2002. In 2001, our Non-Regulated Other segment had a segment operating loss that represented 3.1% of its revenues. The decrease in 2003 is primarily attributable to the declining revenues from our commercial IT outsourcing contracts without a corresponding decrease in SG&A costs. The increase in 2002 was attributable to two primary factors: the sale or dissolution of three business units in 2001 that had consistent operating losses, and the improvement in segment operating income from our commercial and international IT outsourcing business.

Impairment of Goodwill and Intangible Assets

        Goodwill is 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, which includes the goodwill, below its carrying value. During 2003, as a result of the loss of certain significant contracts and proposals related to three reporting units, we determined that goodwill assigned to those reporting units had become impaired. Accordingly, we recorded goodwill impairment charges of $13 million in 2003. The impairment charges represent the excess of the carrying amount of the reporting units' goodwill over the implied fair value of their goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit's assets and liabilities from its estimated fair value based on a discounted cash flow model using revenue and profit forecasts. We did not record any impairment charges on intangible assets in 2003 because there were no circumstances or events that occurred which would have indicated a possible impairment. In 2002 and 2001, we recorded goodwill and intangible asset impairment charges of $3 million and $8 million, respectively, under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."

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 2003, we recognized gains before income taxes of $5 million from the settlement of contingent liabilities related to business units that were sold in prior years. In 2002, we recognized net gains before income taxes of $10 million from the sale of three business units and the settlement of contingent liabilities related to business units sold in 2001. In 2001, we sold several operating assets and business units that did not fit within our strategic plan and individually or in the aggregate were not considered significant divestitures. In connection with these transactions, we received cash and/or equity and debt securities of publicly traded companies and recognized a net gain before income taxes of $121 million.

Interest Income and Interest Expense

        Interest income was $37 million, $50 million and $108 million in 2003, 2002 and 2001, respectively. The decrease in 2003 was primarily attributable to lower average interest rates. Average cash balances during 2003 were actually higher than during 2002 as a result of the proceeds of the June 28, 2002 $800 million debt issuance and the liquidation of all of our remaining shares in VeriSign and Amdocs and related equity collars in the third quarter of 2003. The decrease in interest income in 2002 was primarily attributable to lower average cash and short-term investment balances.

        Interest expense of $45 million in 2003 increased from $14 million in 2002 primarily due to interest on the $800 million debt issuance. Interest expense in 2002 remained constant with 2001. Interest

34

expense also reflects interest on our other outstanding public debt securities that were issued in January 1998, a building mortgage, deferred compensation arrangements and notes payable.

Other Income and Minority Interest Expense

        Other income, net, was $7 million in 2003 and 2002 and $25 million in 2001 and remained constant in 2003. The decrease in other income in 2002 was primarily attributable to lower equity income from our share of income from unconsolidated affiliates because NSI merged with VeriSign and our equity method investment in NSI became an investment in marketable equity securities in 2002.

        During 2003, one of our equity method investees had an impairment of its goodwill. We recognized our proportionate share of the impairment of $4 million which was recorded as other expense.

        Minority interest in income of consolidated subsidiaries was $7 million, $5 million and $6 million in 2003, 2002 and 2001, respectively. We record minority interest in income or loss for third party interests in our AMSEC LLC joint venture and our majority-owned subsidiary, ANXeBusiness Corp. The increase in 2003 was primarily attributable to higher net income of AMSEC LLC while the decrease in 2002 was attributable to a net loss at ANXeBusiness Corp.

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 equity securities and private equity investments resulting from declines in fair values that are deemed to be other-than-temporary are also recorded in this financial statement line item.

        Our policy is to assess whether an impairment loss on our marketable and private equity securities has occurred due to declines in fair value by determining whether the declines in the fair value are deemed to be other-than-temporary in nature. Based on this assessment, we recorded impairment losses totaling $108 million in 2003, $467 million in 2002 and $1.4 billion in 2001. Of the total impairment losses in 2003, 2002 and 2001, $21 million, $437 million and $1.4 billion, respectively, were impairments related to our publicly traded equity securities and $87 million in 2003 and $30 million in 2002 were impairments related to our private equity securities. None of the impairment losses in 2001 were related to private equity securities. Taking into account these impairments in 2003 and the liquidation of all of our remaining shares and related equity collars in VeriSign and Amdocs, as of January 31, 2003, we hold $20 million of publicly-traded equity and debt securities and $108 million of private equity securities.

        Included in the 2003 total net gain on sale of investments of $22 million is a net gain before income taxes of $24 million from the liquidation of all our remaining VeriSign and Amdocs shares and related equity collars. Also, prior to these transactions in 2003, we recognized a net loss before income taxes of $10 million on the sale of VeriSign shares that were not hedged by an equity collar. The remaining balance in 2003 of $8 million relates to net gain before income taxes from sales of certain other 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 in 2001. 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.

35

        As more fully discussed in Note H 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 equity securities is subject to market risk and there may be instances where we will use derivative instruments to manage the risk of potential loss in fair value resulting from decreases in market prices. We had equity collars in place to mitigate the risk of significant price fluctuations of certain of our marketable equity securities. These equity collars were derivative instrument transactions where we locked in a ceiling and floor price for the underlying equity security. As a result of the liquidation in 2003 of all of our remaining VeriSign and Amdocs shares and the equity collars that hedged those shares, we no longer hold equity collars or investments in VeriSign and Amdocs. We also have warrants to purchase equity securities of certain private and publicly-held companies that at the 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. In 2003, we recognized an aggregate net loss before income taxes of $48 million compared to an aggregate net gain before income taxes of $29 million in 2002 from changes in fair value of our derivative instruments as discussed in Note H of the notes to consolidated financial statements. No gains or losses were recognized in prior years because SFAS No. 133 was effective beginning in 2002.

        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 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 could 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 where we sold 6,700,000 shares and 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 shares NSI sold in the offering 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. On June 8, 2000, NSI merged into and became a wholly-owned subsidiary of VeriSign. As a result of this transaction, we recognized a gain before income taxes of $2.4 billion and held shares of VeriSign as an investment in marketable equity securities.

Provision For Income Taxes

        The provision for income taxes as a percentage of income before income taxes was 31.0% in 2003, 28.5% in 2002 and 37.2% in 2001. The favorable rate in 2003 was the result of charitable contributions of appreciated property and the favorable resolution of certain tax positions with state and federal tax authorities, as well as a lower effective state tax rate. The lower 2002 rate reflects a lower income before taxes, which causes a greater effect on the tax rate by the discrete favorable resolution of tax positions with state and federal tax authorities. In addition, the lower 2002 rate includes higher charitable contributions of appreciated property and a lower effective state tax rate than 2001.

Accounting Changes

        As discussed further in Note G of the notes to consolidated financial statements, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which changed the accounting for goodwill from an

36

amortization approach to an impairment-only approach. Upon adoption, we did not have a transitional goodwill impairment charge and, therefore, we did not have a cumulative effect of an accounting change. Prior to implementing SFAS No. 142, goodwill was amortized on a straight-line basis over three to fifteen years. Goodwill amortization expense recognized in 2002 and 2001, net of tax, was $18 million and $19 million, respectively.

        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. SFAS No. 133 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 item attributable to the hedged risk are recognized in earnings and only the ineffective portion of changes in fair value ultimately impacts earnings. The adoption of SFAS No. 133 on February 1, 2001, resulted in a cumulative effect of an accounting change, net of tax, which increased net income by $711 thousand and increased OCI by $443 thousand.

Liquidity and Capital Resources

        Cash and cash equivalents and short-term investments in marketable securities totaled $2.2 billion and $1.2 billion at January 31, 2003 and January 31, 2002, respectively. The increase resulted primarily from the liquidation of all of our remaining shares and related equity collars in VeriSign and Amdocs, as previously discussed, net proceeds from our debt issuance discussed below and funds provided from operating activities.

        On June 28, 2002, we raised $790 million, which is net of underwriters' commissions and reflects an interest discount on the notes, by completing a private offering of $550 million of 10-year senior unsecured notes ("10-year notes") and $250 million of 30-year senior unsecured notes ("30-year notes"). We expect to use the proceeds for general corporate purposes, including, without limitation, future acquisitions, expansion of our outsourcing business, stock repurchases and capital expenditures. Per the terms of the private offering, on August 30, 2002, we filed a registration statement with the Securities and Exchange Commission ("SEC") relating to an offer to exchange any and all of the notes for new notes that are substantially identical to the notes issued on June 28, 2002, except that the new notes have been registered pursuant to an effective registration statement under the Securities Act. The exchange of the notes was completed and substantially all of the private notes were exchanged. The 10-year notes are due on July 1, 2012 and pay interest at 6.25% on a semi-annual basis beginning January 1, 2003. The 30-year notes are due on July 1, 2032 and pay interest at 7.125% on a semi-annual basis beginning January 1, 2003.

        On July 31, 2002, we entered into two new revolving credit facilities ("credit facilities") totaling $750 million with a group of financial institutions that provide for (i) a five-year revolving credit facility of up to $500 million and (ii) a 364-day revolving credit facility of up to $250 million. These credit facilities replaced our previous revolving credit facility that was terminated on July 30, 2002. Borrowings under the new credit facilities are unsecured and bear interest at a rate determined, at our option, based on either LIBOR plus a margin or a defined base rate. We pay a facility fee on the total commitment amount and a fee if utilization exceeds 50% of the total commitment amount. As of January 31, 2003, we were in compliance with all financial covenants under the new credit facilities.

37

        At January 31, 2003 and 2002, there were no borrowings outstanding under either the new or old credit facilities. Our primary sources of liquidity were funds provided by operations, funds from the sale of our remaining shares in VeriSign and Amdocs, and the funds raised by the debt offering and our new credit facilities, of which the entire $750 million was available for borrowing as of January 31, 2003.

        Cash flows generated from operating activities were $549 million in 2003 compared to $573 million in 2002 and $78 million in 2001. Net cash provided by operating activities in 2003 consisted primarily of net income of $246 million increased for non-cash charges to income of $373 million, offset by $70 million used in working capital and other activities. Net cash used in working capital and other activities was primarily for income tax payments.

        Our investing activities generated cash flows of $200 million in 2003 compared to $281 million in 2002 and $776 million in 2001. In 2003, we decreased our capital expenditures and the level of investments in private companies by our subsidiary, SAIC Venture Capital Corporation, and generated less cash from our net transactions in short-term marketable securities compared to 2002. In 2003, our largest source of cash of $631 million from investing activities came from the liquidation of all our remaining shares in VeriSign and Amdocs and the related equity collars. 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 technology companies. We intend to continue to acquire other businesses and make investments in publicly traded and private emerging technology companies in the future. Capital expenditures for property, plant and equipment were $43 million, $89 million and $120 million in 2003, 2002 and 2001, respectively, and decreased in 2003 and 2002 primarily due to lower purchases by Telcordia as part of their cost control efforts that began in the second half of 2002. Our planned capital expenditures for 2004 are expected to be approximately $150 million and include $91 million, which is expected to be financed with debt, for the purchase of land and buildings under synthetic leases discussed below under "Commitments and Contingencies."

        We used cash of $104 million, $1 billion and $882 million for financing activities in 2003, 2002 and 2001, respectively. The primary source of cash generated from financing activities during 2003 was the net proceeds of $790 million from the private debt offering. Repurchases of our common stock, as described below, have been a primary use of our cash:

        Although we have no obligation to make such repurchases, we repurchased stock in the 2003, 2002 and 2001 quarterly stock trades in which more shares were offered for sale than the aggregate number of shares sought to be purchased by authorized buyers. 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

38

out of the non-exchangeable SAIC stock funds, which resulted in increased repurchases from the plans. Repurchases of our shares reduces the amount of retained earnings in the stockholders' equity section of our consolidated balance sheet. If we continue to experience net share repurchases in quarterly trades and other repurchase activities, as described above, in excess of our cumulative earnings, our retained earnings could result in an accumulated deficit within our stockholders' equity.

        There is no public market for our Class A common stock. As more fully described in the "Limited Market" discussion on page 19 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, however, a scheduled trade date could be postponed or cancelled. In fact, the trade originally scheduled for July 26, 2002 was postponed to August 16, 2002 in order to establish a new stock price after it was determined that the stock price set by the board of directors on July 12, 2002 no longer represented a fair market value. All sales in the limited market are made at the prevailing price of the Class A common stock determined by the board of directors or its stock policy committee pursuant to the valuation process described on page 21 of this Form 10-K. If the number of shares offered for sale by stockholders exceeds the number of shares sought to be purchased by authorized buyers in any trade, our stockholders who requested to sell stock may not be able to sell all such stock in that trade. Although we are currently authorized, we are not obligated to purchase shares of stock in the limited market on any trade date. If the increasing trend of trade imbalance continues, there is no assurance that we will continue to purchase such excess shares in the future. 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 in marketable securities, cash flows from operations and borrowing capacity to provide sufficient funds for our operations and capital expenditures. In addition, we expect to finance acquisitions and equity investments in the future with existing cash resources, cash from operations and our borrowing capacity.

Commitments and Contingencies

        As discussed in Note P of the notes to consolidated financial statements, we have two operating leases, which are structured as synthetic leases, on land and buildings for which we expect to use debt to purchase at the end of the initial lease term. Since we intend to continue using the facilities, we expect to purchase the buildings for a total of $91 million at the end of the initial lease term for each of these operating leases, which is August 2003. Future cash requirements would be affected if we purchase the land and buildings. In anticipation of refinancing by purchasing the land and buildings and to reduce our exposure to changing interest rates, 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 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 H 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 $1 million as of January 31, 2003. This contingent liability has not been recorded in the consolidated financial statements pursuant to GAAP.

39

        We have guaranteed $12.5 million, representing 50% of certain credit facilities for our 50% owned joint venture, Data Systems and Solutions, LLC, which we account for using the equity method. In another of our investments, Danet Partnership GBR ("GBR"), a German partnership, GBR has an internal equity market similar to our limited market where we provide liquidity rights to the other GBR investors in certain circumstances. 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 determine with any certainty will occur. The maximum potential obligation, if we assume all the current GBR employees withdraw from GBR, would be $9 million as of January 31, 2003. 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.

        In January 1997 when we formed the INTESA joint venture, we guaranteed INTESA's obligations under the outsourcing services agreement between INTESA and PDVSA. Under the terms of the services agreement, the maximum liability for INTESA for all claims made by PDVSA for damages brought in respect of the services agreement in any calendar year is limited to $50 million. Our maximum obligation under this guarantee would be 60% of INTESA's maximum liability under the services agreement or $30 million. Due to the complex nature of the legal and factual issues involved in this matter and the uncertain economic and political environment in Venezuela, the outcome is not presently determinable. There currently is no liability recorded relating to this guarantee.

        We have another guarantee that relates only to claims brought by the sole customer of another of our joint ventures, Bechtel SAIC Company, LLC, for specific contractual nonperformance of the joint venture. We also have a cross-indemnity agreement with the joint venture partner, pursuant to which we will only be ultimately responsible for the portion of any losses incurred under the guarantee equal to our 30% ownership interest. Due to the nature of the guarantee, as of January 31, 2003, we are not able to project the maximum potential amount of future payments we could be required to make under the guarantee but, based on current conditions, we believe the likelihood of having to make any payment is remote. There currently is no liability recorded relating to this guarantee.

        As previously disclosed in the our filings with the SEC, our Telcordia subsidiary instituted arbitration proceedings against Telkom South Africa as a result of a contract dispute. Telcordia is seeking to recover damages of approximately $130 million, plus interest at a rate of 15.5%. 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. In a Partial Award dated as of September 27, 2002, the arbitrator dismissed the counterclaims of Telkom South Africa and found that Telkom South Africa repudiated the contract. Telcordia initiated proceedings in the U.S. to confirm the Partial Arbitral Award. Meanwhile, Telkom South Africa has requested that the South African High Court set aside the Partial Award, dismiss the Arbitrator and the International Court of Arbitration, and submit the dispute to a new arbitration panel in South Africa. Although Telcordia believes Telkom's application is without merit and constitutes an abuse of process, no assurance can be given that the High Court will not consider Telkom South Africa's petition, or provide all or some portion of the relief requested. Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcome of the arbitration and the related court actions are not presently determinable. We have no significant balance sheet assets recorded related to this contract as of January 31, 2003 or 2002.

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

40

        The following table summarizes our contractual and other long-term obligations. For contractual obligations, we included payments that we have a legal and binding obligation to make. We did not include deferred income tax liabilities of $48 million (Note L of the notes to consolidated financial statements) or other long-term liabilities of $269 million, which primarily relate to pension and postretirement benefit obligations, because it is not entirely certain when those amounts will become due as they are dependent in part on certain events or circumstances.

(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 P of the notes to consolidated financial statements, the operating leases for certain facilities will terminate in August 2003. For purposes of this table, we have assumed that we will purchase the land and buildings using five-year debt.

Recently Issued Accounting Pronouncements

        In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be measured initially at fair value and recognized when the liability is incurred rather than the date a company makes a commitment to an exit plan. Adoption of SFAS No. 146 did not have a material impact on our consolidated financial position or results of operations.

        In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor and clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and the disclosure provisions are effective for the year ended January 31, 2003. Adoption of FIN 45 did not have a material impact on our consolidated financial position or results of operations.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment of SFAS No. 123, "Accounting for Stock-Based Compensation," which provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and is effective for the fiscal year ended January 31, 2003. In addition, SFAS No. 148 also requires prominent disclosures in both annual and quarterly financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have elected to not voluntarily adopt the recognition provisions of SFAS No. 123 and have provided the required disclosures;

41

therefore, adoption of SFAS No. 148 did not have an impact to our consolidated financial position or results of operations.

        In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," which requires consolidation of entities in which we do not have a majority voting interest but are deemed to have a controlling interest. FIN 46 is effective immediately for interests in entities created after January 31, 2003. For interests in entities created prior to February 1, 2003, FIN 46 is effective for the fiscal year ending January 31, 2005. FIN 46 would apply to our existing synthetic leases, disclosed in Note P, however, these leases expire in August 2003. We intend to purchase the land and buildings at lease expiration, and therefore, FIN 46 will not apply.

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, 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 cash equivalents, investment portfolio, 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. As more fully described in Note H 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 limited use of derivative agreements to hedge interest rate risks.

        During 2003, our exposure to interest rate risk increased. As described in Note M of the notes to consolidated financial statements, in June 2002, we issued $550 million of 6.25% 10-year fixed rate debt and $250 million of 7.125% 30-year fixed rate debt. In anticipation of this debt issuance, we also entered into a series of treasury lock contracts to economically lock in the effective borrowing rate on portions of the anticipated debt issuance. Due to declines in interest rates from the dates of entering into the treasury lock contracts to the date of the debt issuance, we were required to pay $8 million to settle the treasury lock contracts upon the debt issuance. Since these new debt issuances and the January 1998 public debt issuances bear interest at a fixed rate, we have exposure to decreases in interest rates because we still are required to pay the fixed rate even if current interest rates are lower.

42

        We have increased market risk due to changes in interest rates because the proceeds from the 2003 debt issuance and the VeriSign and Amdocs transactions, described below in the discussion of equity price risks, contributed to higher amounts of cash equivalents and managed portfolio investments that are subject to interest rate risk at January 31, 2003. On an overall basis, interest rates at January 31, 2003 decreased from January 31, 2002. If rates stay at current levels or continue to decrease, proceeds from maturities of fixed income securities may be reinvested at lower interest rates.

        The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations and short-term and long-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.

(1)

British pound denominated

(2)

Euro denominated

43

        Foreign Currency Risk—Although the majority of our transactions are denominated in U.S. dollars, some transactions are based in various foreign currencies. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to mitigate adverse fluctuations in earnings and cash flows associated with foreign currency exchange rate fluctuations. Our policy allows us to actively manage cash flows, anticipated transactions and firm commitments through the use of natural hedges and forward foreign exchange contracts. The currencies hedged as of January 31, 2003 are the Canadian dollar and the Euro. We do not use foreign currency derivative instruments for trading purposes.

        To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates on market sensitive instruments. The fair values for foreign exchange forward contracts are estimated using spot rates in effect on January 31, 2003. The differences that result from comparing hypothetical foreign exchange rates and actual spot rates as of January 31, 2003 are the hypothetical gains and losses associated with foreign currency risk.

        A 10% adverse movement in levels of foreign currency exchange rates relative to the U.S. dollar as of January 31, 2003, with all other variables held constant, would result in a decrease in the fair values of the forward foreign exchange contracts by approximately $1.4 million.

        Equity Price Risk—We are exposed to equity price risks on our strategic investments in publicly-traded equity securities, which are primarily in the high-technology market. In 2002 and for the majority of 2003, the majority of our publicly-traded equity securities portfolio consisted of our investments in VeriSign and Amdocs. During 2002 and 2003, we used equity collars to mitigate the risk of significant price fluctuations of our investments in VeriSign and Amdocs. Equity collars are derivative instrument transactions where we lock in a ceiling and floor price for the underlying equity security to minimize our risk of loss since we locked in a floor price. These derivative instruments were designated as fair value hedges of the underlying publicly-traded equity securities and, therefore, the changes in the fair value of the derivative and the hedged item attributable to the hedged risk were recognized in earnings. During 2003, we liquidated our remaining shares in VeriSign and Amdocs and the equity collars that hedged those shares for proceeds of $631 million and recognized a net gain before income taxes of $24 million. As a result of these transactions, we no longer have market exposure related to VeriSign or Amdocs and our overall exposure to equity price risk is substantially reduced. At January 31, 2003, the quoted fair value of our publicly-traded equity securities was approximately $16 million compared to $687 million at January 31, 2002. The market risk associated with these equity investments is the potential loss in fair value that would result from a decrease in market prices. Based on our position at January 31, 2003, a 10% decrease in market prices, with all other variables held constant, would result in a decrease in fair value of our publicly-traded equity securities of approximately $1.6 million.

Item 8. Financial Statements and Supplementary Data

        See our Consolidated Financial Statements and Financial Statement Schedule attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Form 10-K.

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

        Not applicable.

44

PART III

Item 10. Directors and Executive Officers of the Registrant

        For information with respect to our executive officers, see "Executive Officers of the Registrant" at the end of Part I of this Form 10-K. For information with respect to our directors, see "Election of Directors" appearing in the 2003 Proxy Statement, which information is incorporated by reference into this Form 10-K.

Item 11. Executive Compensation

        For information with respect to executive compensation, see the information set forth under the captions "Directors' Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the 2003 Proxy Statement, which information (except for the information under the sub-captions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Presentation") is incorporated by reference into this Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management

        For information with respect to the security ownership of certain beneficial owners and management, see the information set forth under the caption "Beneficial Ownership of the Company's Securities" in the 2003 Proxy Statement, which information is incorporated by reference into this Form 10-K.

        Information with respect to our equity compensation plans is set forth below:

(1)

The following equity compensation plans approved by security holders are included in this plan category: the 1999 Stock Incentive Plan, the 1998 Stock Option Plan, the 1995 Stock Option Plan, the Restated Bonus Compensation Plan and the 2001 Employee Stock Purchase Plan.

(2)

Represents shares reserved for issuance upon the exercise of outstanding options awarded under the 1999 Stock Incentive Plan, the 1998 Stock Option Plan and the 1995 Stock Option Plan. Does not include shares to be issued pursuant to purchase rights under the 2001 Employee Stock Purchase Plan.

(3)

Represents 6,999,730 shares under the 2001 Employee Stock Purchase Plan and 27,303,149 shares under the 1999 Stock Incentive Plan. The maximum number of shares that may be awarded under the 1999 Stock Incentive Plan is limited to the sum of (i) 24 million shares, (ii) the number of shares available for awards under the 1998 Stock Option Plan as of September 30, 1999 and (iii) the number of shares which become available under the 1998 Stock Option Plan after September 30, 1999 as a result of forfeitures, expirations, cancellations or sales of shares acquired

45

through the exercise of options to us to satisfy tax withholding obligations. In addition, the 1999 Stock Incentive Plan provides for an automatic share reserve increase on the first day of each calendar year after 1999 by an amount equal to 5% of outstanding shares of stock on such day. However, shares reserved for future awards under the 1999 Stock Incentive Plan is limited to 15% of total outstanding shares. The 27,303,149 shares under the 1999 Stock Incentive Plan represent 15% of total outstanding shares as of January 31, 2003. The 1998 Stock Option Plan and the 1995 Stock Option Plan have terminated and no additional options may be granted under these plans.

(4)

The Restated Bonus Compensation Plan provides for bonus awards that may be paid in cash, restricted stock or vested stock. The Restated Bonus Compensation Plan does not provide for a maximum number of shares available for future issuance; however, the bonus pool for each fiscal year cannot exceed 7.5% of our revenue for the fiscal year.

(5)

The following equity compensation plans not approved by security holders are included in this plan category: the Stock Compensation Plan and the Management Stock Compensation Plan. These plans do not provide for a maximum number of shares available for future issuance.

        Some of the principal features of the Stock Compensation Plan and the Management Stock Compensation Plan (collectively, the "Stock Compensation Plans") are summarized below, but the summary is qualified in its entirety by the full text of the Stock Compensation Plans. Stockholder approval of the Stock Compensation Plans was not required.

Summary of the Stock Compensation Plans

        The Stock Compensation Plans have been adopted to provide a long-term incentive to key employees by making deferred awards of shares of our Class A common stock. All officers and employees are eligible to receive awards under the Stock Compensation Plan. However only a select group of management and highly compensated senior employees are eligible to receive awards under the Management Stock Compensation Plan. We intend to limit participants of the Management Stock Compensation Plan to individuals that would permit the plan to be treated as a "top hat" plan under applicable Internal Revenue Service and Department of Labor Regulations.

        The awarding authority (appointed by our board of directors) designates those key employees who will receive an award and the number of share units to be awarded. The number of share units awarded represents an interest in a trust maintained by Wachovia Bank, N.A. as trustee under a trust agreement between the trustee and us. The trust is a special type of trust known as a "rabbi trust." In order to avoid current taxation of awards under the Stock Compensation Plans, the trust must permit our creditors to reach the assets of the trust in the event of our bankruptcy or insolvency. Each share unit generally corresponds to one share of Class A common stock, but the employee receiving an award of share units will not have an ownership interest in the shares of Class A common stock represented by the share units.

        The awarding authority will establish a vesting schedule of not more than seven years for each account in the trust. The accounts will generally vest at the rate of one-third at the end of each of the fifth, sixth and seventh year following the date of award. The death of a participant or a change in control of us will result in full vesting of an award. A participant will forfeit any unvested portions of the account if the participant's employment terminates for any reason other than death. We receive the benefit of forfeited amounts either by return of shares to us or use of the forfeitures to satisfy future awards under the Stock Compensation Plans.

        Vested account balances will be distributed at the earlier of the end of the seven-year vesting period or upon termination of employment. However, the participant may elect, within 90 days from the date of the award, to receive distribution of the account as it vests. In the case of the Management Stock Compensation Plan, the employee may defer distribution until termination of employment.

46

        Benefits will be distributed in the form of shares of Class A common stock unless a distribution in stock is impossible or would create an adverse impact on us. Any shares distributed will be subject to our right of first refusal and right of repurchase on termination of employment as set forth in our certificate of incorporation. In addition, with respect to the Management Compensation Plan, any shares distributed upon termination of employment will also be subject to the right of repurchase six months after distribution, as set forth in a Stock Restriction Agreement between the participant and us. Participants will be taxed on the value of any amounts distributed from the Stock Compensation Plans at the time of the distribution.

        The day-to-day administration of the Stock Compensation Plans is provided by the nonqualified plans committee appointed by our board of directors. We have the right to amend or terminate the Stock Compensation Plans at any time and for any reason.

Item 13. Certain Relationships and Related Transactions

        For information with respect to the interests of our management and others in certain transactions, see the information set forth under the caption "Certain Relationships and Related Transactions" in the 2003 Proxy Statement, which information is incorporated by reference into this Form 10-K.

Item 14. Controls and Procedures

(a)

Evaluation of disclosure controls and procedures.    Within the 90 days prior to the date of filing this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of management, including J. Robert Beyster (Chief Executive Officer) and Thomas E. Darcy (Chief Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, J. Robert Beyster and Thomas E. Darcy concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings.



(b)

Changes in internal controls.    There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls. There were no significant deficiencies or material weaknesses and, therefore, no corrective actions were required.

47

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

        (a)    Documents filed as part of the report:    

        1.    Financial Statements    

        Our Consolidated Financial Statements are attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Form 10-K.

        2.    Financial Statement Schedules    

Schedule II—Valuation and Qualifying Accounts.

        All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

        3.    Exhibits    

48

*

Executive Compensation Plans and Arrangements

        (b)    Reports on Form 8-K in the fourth quarter of the fiscal year ended January 31, 2003:    

        A Report on Form 8-K was filed on January 14, 2003. Disclosure was made under Item 5, Other Events and Regulation FD Disclosure and Item 7, Financial Statements and Exhibits.

49

SIGNATURES

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

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

50

51

CERTIFICATION

I, J. Robert Beyster, certify that:

1.

I have reviewed this annual report on Form 10-K of Science Applications International Corporation;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

52

CERTIFICATION

I, Thomas E. Darcy, certify that:

1.

I have reviewed this annual report on Form 10-K of Science Applications International Corporation;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

53

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

        All other financial statement schedules are omitted because they are not applicable or the required information is shown on the consolidated financial statements or the notes thereto.

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Science Applications International Corporation:

        We have audited the accompanying consolidated balance sheets of Science Applications International Corporation and its subsidiaries (the "Company") as of January 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended January 31, 2003. Our audits also included the financial statement schedule listed on page F-43. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note A to the consolidated financial statements, effective February 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142. Effective February 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities to conform with Statement of Financial Accounting Standards No. 133, as amended.

/s/  DELOITTE & TOUCHE LLP      

San Diego, California
March 24, 2003

F-2

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME