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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended April 30, 2005

OR

Commission file number: 0-12771

Science Applications International Corporation

(Exact name of registrant as specified in its charter)

10260 Campus Point Drive

San Diego, California 92121

(858) 826-6000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

As of May 31, 2005, the Registrant had 174,696,932 shares of Class A common stock, $.01 par value per share, issued and outstanding, and 216,593 shares of Class B common stock, $.05 par value per share, issued and outstanding.

PART I – FINANCIAL INFORMATION

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Income

(Unaudited, in millions, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited, in millions)

See accompanying notes to condensed consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited, in millions)

See accompanying notes to condensed consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements

Unaudited

Note 1 – Summary of Significant Accounting Policies:

The accompanying financial information has been prepared in accordance with the instructions to Form 10-Q and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ from those estimates.

Certain amounts for the three months ended April 30, 2004 have been reclassified in the condensed consolidated financial statements to conform to the presentation as of and for the three months ended April 30, 2005.

In the opinion of management, the unaudited financial information as of April 30, 2005 and for the three months ended April 30, 2005 and 2004 reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation thereof. Operating results for the three months ended April 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2006. For further information, refer to the consolidated financial statements and footnotes included in the Company’s 2005 Annual Report on Form 10-K.

Discontinued Operations

On March 15, 2005, the Company completed the sale of its subsidiary, Telcordia Technologies, Inc. (“Telcordia”). The operating results of Telcordia have been classified as discontinued operations (Note 12) for all periods presented.

Common Stock

The Company is authorized to issue 1 billion shares of Class A common stock, par value $.01 and 5 million shares of Class B common stock, par value $.05. As of April 30, 2005 and January 31, 2005, 174,771,000 and 177,369,000 shares of Class A common stock, respectively, and 217,000 shares of Class B common stock were issued and outstanding. Each share of Class B common stock is convertible into 20 shares of Class A common stock. Class A common stock and Class B common stock are collectively referred to as common stock in the condensed consolidated financial statements and notes to condensed consolidated financial statements and are shown assuming that the Class B common stock was converted into Class A common stock.

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

Stock-Based Compensation

The Company accounts for employee stock-based compensation using the intrinsic value method for each period presented under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No compensation cost is reflected in net income for options granted to employees, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The Company accounts for stock options granted to non-employees using the fair value method under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 as described in Note 1 of the notes to consolidated financial statements of the Company’s 2005 Annual Report on Form 10-K:

For the three months ended April 30, 2005, the pro forma stock-based employee compensation adjustment resulted in income rather than expense because a significant number of unvested stock options were forfeited by employees of Telcordia as a result of the sale of Telcordia (Note 12).

Note 2 – Business Segment Information:

The following summarizes interim business segment information:

As discussed in more detail in Note 2 of the notes to consolidated financial statements in the Company’s 2005 Annual Report on Form 10-K, certain corporate expenses are reflected in segment operating income based on agreed-upon allocations to the segments or as required by Government Cost Accounting Standards. Corporate expense variances to these allocations are retained in the Corporate and Other segment. Effective February 1, 2005, the Company no longer allocates an internal interest charge or credit (“Cost of Capital”). Segment information for the three months ended April 30, 2004 has been revised to reflect the elimination of the Cost of Capital allocation. In certain circumstances, for management purposes as determined by the chief operating decision maker, certain revenue and expense items related to operating business units are excluded from the evaluation of a business unit’s operating performance and reflected in the Corporate and Other segment. Elimination of intersegment revenues is also reflected in the Corporate and Other segment. Sales between segments were $2 million and $10 million for the three months ended April 30, 2005 and 2004, respectively, and were recorded at cost.

As discussed in Note 12, as a result of the sale of Telcordia, prior year segment information has been revised to conform to the three months ended April 30, 2005 presentation of Telcordia as discontinued operations. Since Telcordia represented the entire Non-Regulated Telecommunications segment, the Company no longer has continuing operations in this segment.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

The following is a summary of depreciation and amortization included in the calculation of reportable segment operating income:

The following reconciles total reportable segment operating income to the Company’s consolidated operating income:

Note 3 – Receivables:

Receivables include $43 million of costs incurred on projects for which the Company has 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 at April 30, 2005. The Company records revenue, to the extent of costs, for these anticipated contract modifications.

Note 4 – Derivative Financial Instruments:

Interest Rate Risk

As more fully described in Note 8 of the notes to consolidated financial statements in the Company’s 2005 Annual Report on Form 10-K, the Company uses forward interest rate swap agreements to manage its interest rate risk. For the three months ended April 30, 2005 and 2004, the net impact on the condensed consolidated statements of income of all outstanding swap agreements was not material. At April 30, 2005, the combined fair value of all of the Company’s interest rate swap agreements was $12 million, of which $3 million and $9 million were reflected in other accrued liabilities and other long-term liabilities, respectively.

Foreign Currency Risk and Other Derivatives

For the three months ended April 30, 2005 and 2004, net losses on foreign currency forward exchange contracts and other derivatives and the related fair values at April 30, 2005 and January 31, 2005 were not material.

Note 5 – Acquisitions of Businesses:

During the three months ended April 30, 2005, the Company did not complete any acquisitions of businesses.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

Note 6 – Goodwill and Intangible Assets:

The changes in the carrying amount of goodwill by segment for the three months ended April 30, 2005 are as follows:

Goodwill adjustments of $8 million for the three months ended April 30, 2005 were a result of adjustments to net assets acquired from a prior year acquisition.

Intangible assets as of April 30, 2005 and January 31, 2005 consist of the following:

Customer contracts and non-compete agreements with a gross carrying value of $3 million became fully amortized at January 31, 2005 and, therefore, are no longer reflected in the gross carrying value at April 30, 2005. Amortization expense related to amortizable intangible assets was $6 million and $4 million for the three months ended April 30, 2005 and 2004, respectively. Based on the intangible assets as of April 30, 2005, the estimated annual amortization expense of intangible assets for the years ending January 31 is as follows (in millions):

Actual amortization expense in future periods could differ from these estimates as a result of acquisitions, divestitures, impairments and other factors.

For the three months ended April 30, 2005 and 2004, the Company did not recognize any impairment losses on intangible assets.

Note 7 – Revolving Credit Facilities:

The Company has two 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, which allows borrowings until July 2007 and (ii) a five-year revolving credit facility of up to $250 million, which allows borrowings until July 2009. Borrowings under the credit facilities are unsecured and bear interest at a rate determined, at the Company’s option, based on either LIBOR plus a margin

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

or a defined base rate. The Company pays a facility fee on the total commitment amount and a fee if utilization exceeds 50% of the total commitment amount. During the three months ended April 30, 2005 and 2004, the Company did not borrow under either of its credit facilities.

The Company has a firm fixed-price contract with the Greek Government with bonding requirements, approximately $116 million of which have been met through the issuance of standby letters of credit under the $500 million five-year revolving credit facility. The standby letters of credit reduce the amount available for borrowings under the $500 million five-year revolving credit facility. The Company pays fees for the standby letters of credit issued under the $500 million five-year revolving credit facility, but the outstanding standby letters of credit are not considered borrowings and the Company does not incur related interest cost. The terms of the standby letters of credit require them to remain outstanding until the customer has formally accepted the system pursuant to the contract. For further discussion of this contract, refer to Note 11. The Company does not expect to issue any additional standby letters of credit for this contract under the $500 million five-year revolving credit facility.

As of April 30, 2005, the entire amount under the $250 million five-year revolving credit facility was available and $384 million of the $500 million five-year revolving credit facility was available. These credit facilities contain customary affirmative and negative covenants. The financial covenants contained in the credit facilities require the Company to maintain a trailing four quarter interest coverage ratio of not less than 3.5 to 1.0 and a ratio of consolidated funded debt to a trailing four quarter earnings before interest, taxes, depreciation and amortization of not more than 3.0 to 1.0. These covenants also restrict certain of the Company’s activities, including, among other things, the Company’s ability to create liens, dispose of assets, merge or consolidate with other entities, and create guaranty obligations. The credit facilities also contain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events; nonpayment; cross-defaults to other debt; breach of specified covenants; change of control and material inaccuracy of representations and warranties. As of April 30, 2005, the Company was in compliance with all the financial covenants under the credit facilities.

Note 8 – Accumulated Other Comprehensive Loss and Comprehensive Income:

As of April 30, 2005 and January 31, 2005, accumulated other comprehensive loss is comprised of unrealized gains and losses on available-for-sale securities and derivative instruments, minimum pension liability adjustments and foreign currency translation adjustments as follows:

Comprehensive income, which combines net income, unrealized gains and losses on the Company’s available-for-sale marketable securities and derivative instruments, minimum pension liability adjustments and foreign currency translation adjustments, consists of the following:

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

Note 9 – Earnings Per Share (EPS):

A summary of the elements included in the computation of basic and diluted EPS is as follows:

Note 10 – Net (Loss) Gain on Marketable Securities and Other Investments, Including Impairment Losses:

For the three months ended April 30, 2005, the Company recognized losses of $2 million on certain private equity securities due to declines in fair market value that were deemed to be other-than-temporary. For the three months ended April 30, 2004, net gain on sale of investments was $3 million. The carrying value of the Company’s private equity securities as of April 30, 2005 is $46 million.

Note 11 – Commitments and Contingencies:

Telkom South Africa

As disclosed in the Company’s 2005 Annual Report on Form 10-K, the Company’s former Telcordia subsidiary instituted arbitration proceedings before the International Chamber of Commerce (“ICC”) against Telkom South Africa in March 2001 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 counterclaimed, seeking 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. On September 27, 2002, Telcordia prevailed in the initial phase of the arbitration. The arbitrator found that Telkom repudiated the contract and dismissed Telkom’s counterclaims against Telcordia. The damages to be recovered by Telcordia were to be determined in a second phase of the arbitration. Telkom challenged the arbitration decision in the South African High Court (Transvaal Provincial Division), and, on November 27, 2003, the High Court judge ordered that the arbitration decision be set aside, that the arbitrator and the ICC be dismissed and that the case be re-arbitrated before a panel of three retired South African judges. Although the High Court judge denied Telcordia’s motion for leave to appeal his ruling, on November 29, 2004, the South African Supreme Court of Appeal granted Telcordia’s motion for leave to appeal the judge’s ruling and will hear the appeal. In parallel proceedings in the United States District Court (Northern District of New Jersey), Telcordia is seeking to have its ICC arbitration award confirmed. On January 24, 2005, the District Court declined to confirm Telcordia’s award and in a February 17, 2005 opinion concluded that the District Court does not have personal jurisdiction over Telkom South Africa. On March 1, 2005, Telcordia filed its Notice of Appeal with the U.S. District Court of Appeals for the 3^rd Circuit.

Effective March 15, 2005, the Company completed the sale of Telcordia (Note 12). Pursuant to the definitive stock purchase agreement, the Company is entitled to receive all of the net proceeds from any judgment or settlement with Telkom South Africa,

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

and, if this dispute is settled or decided adversely against Telcordia, the Company is obligated to indemnify the buyer of Telcordia against any loss that may result from such an outcome.

Due to the complex nature of the legal and factual issues involved and the uncertainty of litigation in general, the outcomes of the arbitration and the related court actions are not presently determinable. The Company does not have any assets or liabilities recorded related to this contract and the related legal proceedings as of April 30, 2005 and January 31, 2005.

Firm Fixed-price Contract with the Greek Government

Overview – The Company has a firm fixed-price contract (the “Contract”) with the Greek Government, as represented by the Ministry of Defense, to provide a C4I (Command, Control, Communications, Coordination and Integration) System (the “System”) that was used to support the 2004 Athens Summer Olympic Games. To date, the customer has not formally accepted the System under the terms of the Contract and has not made certain milestone payments. The parties have had numerous disagreements concerning the scope, duration and results of the testing and acceptance process and other contractual issues. The Company has been in discussions with the customer to attempt to resolve the contractual issues through an appropriate contract amendment; however, no agreement has been reached to date. In addition, the Greek Government has advised the Company that it will not be able to execute a contract amendment until an issue concerning the legality of its execution of the original Contract is resolved. Additional information concerning the Contract and its status is set forth below.

Original Contract – The Contract called for the Company to provide the System and related services. The System is comprised of 29 subsystems, organized into three major functional areas: the Command Decision Support System (CDSS), the Communication and Information System (CIS), and the Command Center Systems (CCS). Under the Contract, final acceptance of the System was to take place by September 1, 2004, at a price of approximately $174 million. The Contract also calls for the provision of five years of System support and maintenance at approximately $11 million, and the provision of ten years of TETRA (radio) network services at approximately $97 million. The Contract contains an un-priced option for an additional five years of TETRA network services. To date, the Company has been paid approximately $143 million.

Memorandum of Understanding – On July 7, 2004, shortly before the start of the Olympic Games, the Company entered into an agreement (the “Memorandum of Understanding” or “MOU”) with the Greek Government, as represented by the Coordination Committee for Olympic Preparation, pursuant to which the parties recognized and agreed that (i) delivery and acceptance of the System had not been completed by the scheduled date, (ii) delivery would be made of the System in its then-current state for use at the Olympic Games, (iii) a new process for testing and acceptance of the System would be instituted, with final acceptance to occur no later than October 1, 2004, (iv) the Greek Government would proceed with the necessary actions for the completion of a contract modification as soon as possible, and (v) the Company would receive a milestone payment of approximately $24 million immediately upon the execution of the contract modification. To date, the contract modification contemplated by the Memorandum of Understanding has not been executed. The customer has further asserted that the MOU is non-binding, and disputes have arisen concerning its meaning and effect.

Delivery of System, Testing and Negotiations – The dispute between the parties relates primarily to the functionality of the CDSS portion of the System delivered in November 2004, and more specifically to the operational effectiveness and contractual compliance of CDSS. The customer has performed subsystem acceptance tests on each of the 29 subsystems. The Company believes that the nature of the tests performed by the customer were not in accordance with the terms of either the Contract or the MOU, and that the test results do not accurately portray the capabilities of CDSS or its compliance with the Contract’s specifications. The parties are presently unable to proceed to the overall System acceptance tests until the dispute concerning CDSS is resolved. System acceptance also has been impeded by disputes relating to the contractual compliance of several sub-systems provided by the Company’s subcontractors. The Company has been in discussions with the customer to attempt to resolve the contractual issues through an appropriate contract amendment; however, no agreement has been reached to date.

Performance and Payment Bonds – In connection with this Contract, the Company entered into payment and performance bonding requirements, which currently total $248 million. The bonding requirements have been met through the issuance of standby letters of credit of which $116 million was issued under the Company’s credit facility (Note 7) and $132 million was issued by certain other banks. Under the terms of these bonding arrangements, the customer could call these standby letters of credit at any time. Certain of the Company’s subcontractors have provided the Company with performance bonds in the aggregate amount of approximately $105 million, guaranteeing their performance under their subcontracts.

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

Subcontracts – The Company has subcontracted a significant portion of the customer requirements under the Contract, and payments to the subcontractors are generally required only if the Company receives payment from the customer. In addition, the Contract required the Company to lease certain equipment under an operating lease from a subcontractor for ten years as further described in Note 16 of the notes to consolidated financial statements in the Company’s 2005 Annual Report on Form 10-K. On March 29, 2005, the Company received written notice from its principal subcontractor that the subcontractor intended to discontinue its provision of TETRA network services unless payment were made to the subcontractor in the amount of approximately $9 million within 15 days of the letter. The customer has been made aware of the subcontractor’s demand. To date, the customer has taken no action, the amount remains unpaid, and the subcontractor continues to provide the services.

Financial Status of the Contract –The Company has recorded the financial position of the Contract based on its best estimate of the loss to be realized under the Contract, and the Company is actively engaged in continuing negotiations with the customer. The situation remains extremely complex and dynamic, involving multiple government agencies, customer elements and government representatives having different roles and at times, expressing inconsistent positions. During the three months ended April 30, 2005, the Company recorded an additional $7 million loss on this Contract, reflecting changes in management’s estimate of the loss on this Contract as a result of the failure by the parties to reach agreement on a contract modification; the unfavorable results of the customer’s testing of the system and their unwillingness to accept the system; and other recent developments. The total loss on this Contract since inception is $45 million. This loss excludes potential subcontractor liabilities of $11 million that management believes will not be paid under the subcontract terms. As of April 30, 2005, the Company has net billed and unbilled receivables totaling $19 million. The unbilled receivables cannot be billed until customer acceptance or a contract modification is executed. If the Company ultimately did not receive any additional payments on the system delivery phase of the Contract, the Company would have to record an additional loss of $23 million, which represents the receivables balance of $19 million and $4 million of unrecoverable Value Added Taxes (VAT). If the Company ultimately did not receive any additional payments on the system delivery phase of the Contract and paid its subcontractors in full, the Company would have to record an additional loss of $36 million, which represents the receivables balance of $19 million, the potential subcontractor liabilities of $11 million which are not currently accrued, and $6 million of unrecoverable VAT. If the parties are unable to resolve their disputes through negotiation or contract amendment, the dispute would be resolved in binding arbitration. Under the Contract, any disputes will ultimately be resolved by binding arbitration before three Greek arbitrators in Greece. If the customer prevails in any such arbitration and the Company is found to have materially breached the Contract, the customer may be entitled to recover damages, which could include excess reprocurement costs or repayment of amounts paid under the Contract. Additionally, as previously noted, the customer could call the $248 million of payment and performance bonds.

DS&S Joint Venture

DS&S maintains a $25 million credit facility, under which about $23 million in principal amount is outstanding at April 30, 2005. DS&S currently is in default of certain covenants under this facility and is in negotiations with the bank to cure the default. The Company has guaranteed approximately $12.5 million of the obligations of DS&S under this facility, but the Company has not been required to perform on this guarantee. At January 31, 2005, the Company provided a loan of $1 million to DS&S. The Company and the other joint venture member have guaranteed the payment of 50% of certain legal and accounting fees incurred by DS&S in conjunction with an ongoing government investigation. As of April 30, 2005, the fair value of the guarantee for legal and accounting fees is not material to the Company, and the Company has not been required to perform on this guarantee.

INTESA Joint Venture

The Company’s discontinued joint venture operation, INTESA, is involved in various legal proceedings as described in the Company’s 2005 Annual Report on Form 10-K. During the three months ended April 30, 2004, the Overseas Protection Insurance Company (“OPIC”) made a finding that expropriation by PDVSA, the joint venture partner, had occurred and on May 11, 2004, OPIC paid the Company approximately $6 million in settlement of the Company’s claim. The political and economic environment in Venezuela has affected the Company’s relationship with PDVSA and there has been no activity related to dissolving the joint venture or having the joint venture declare bankruptcy since 2003, when INTESA’s operations were suspended and ceased.

Under the 1997 outsourcing services agreement between INTESA and PDVSA, the Company guaranteed INTESA’s obligations. 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 service agreement in any calendar year is limited to $50 million. Therefore, the Company’s maximum obligation under the guarantee is $20 million based on PDVSA’s 40% ownership percentage in INTESA. This guarantee still remains because there has been no resolution of the dispute regarding INTESA. The Company has not recorded any liability

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

related to this guarantee. In addition, the Company does not have any assets or liabilities recorded related to this discontinued operation as of April 30, 2005 and January 31, 2005.

Other Joint Ventures

In one of the Company’s investments in affiliates accounted for under the equity method, the Company is an investor in Danet Partnership GBR (“GBR”), a German partnership. GBR has an internal equity market similar to the Company’s limited market. The Company is required to 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 the Company in exchange for the current fair value of those shares. The Company may pay the put price in shares of its common stock or cash. The Company does not currently record a liability for these rights because their exercise is contingent upon the occurrence of future events which the Company cannot determine will occur with any certainty. The maximum potential obligation, if the Company assumes all the current GBR employees are withdrawing from GBR, would be $13 million as of April 30, 2005. If the Company were to incur the maximum obligation and buy all the shares outstanding from the other investors, the Company would then own 100% of GBR.

The Company has a guarantee that relates only to claims brought by the sole customer of another of its joint ventures, Bechtel SAIC Company, LLC, for specific contractual nonperformance of the joint venture. The Company also has a cross-indemnity agreement with the joint venture partner, pursuant to which it will only be ultimately responsible for the portion of any losses incurred under the guarantee equal to its ownership interest of 30%. Due to the nature of the guarantee, as of April 30, 2005, the Company is not able to project the maximum potential amount of future payments it could be required to make under the guarantee but, based on current conditions, the Company believes the likelihood of having to make any payment is remote. There currently is no liability recorded relating to this guarantee.

On September 15, 2004, the Company entered into an agreement with EG&G Technical Services, Inc. (“EG&G”) and Parsons Infrastructure & Technology Group, Inc. (“Parsons”) to form Research and Development Solutions, LLC (“RDS”), a Delaware limited liability company that will pursue contracts offered by the Department of Energy’s National Energy Technical Laboratory. The Company, EG&G and Parsons, each have a one-third equal joint venture interest. In conjunction with a contract award to RDS, each joint venture partner was required to sign a performance guarantee agreement with the U.S. Government. Under this agreement, the Company unconditionally guarantees all of RDS’s obligations to the U.S. Government under the contract award, which has an estimated total value of $218 million. The Company also has a cross-indemnity agreement with each of the other two joint venture partners to protect it from liabilities for any U.S. Government claims resulting from the actions of the other two joint venture partners and to limit the Company’s liability to its share of the contract work. As of April 30, 2005, the fair value of the guarantee is not material to the Company.

Gracian v. SAIC Class Action Lawsuit

On March 4, 2005, the Company was served with a class action lawsuit filed in California Superior Court for the County of San Diego brought by a former employee on behalf of herself and others similarly situated that alleged that the Company improperly required exempt salaried and professional employees in the State of California to utilize their paid leave balances for partial day absences. The plaintiffs contend that the Company’s policy violates California law and seeks, among other things, the unpaid vacation balance allegedly owed to plaintiffs, overtime compensation, penalties, interest, punitive damages and attorney fees. The Company is analyzing the lawsuit and the underlying issues. On May 31, 2005, the California Labor Commissioner issued a memorandum to the California Division of Labor Standards Enforcement Staff that interprets California law in a way that supports the Company’s legal positions in this case. The May 31, 2005 memorandum removes a prior California Labor Commissioner opinion letter that interpreted California law in a way that had supported the plaintiffs’ legal position. The Company does not expect the ultimate resolution of this matter to have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Other

In the normal conduct of its business, the Company seeks to monetize its patent portfolio through licensing agreements. The Company also has and will continue to defend its patent positions when it believes its patents have been infringed and is involved in such litigation from time to time. As described in Note 12, per the terms of the sale of Telcordia that was effective on March 15, 2005, the Company will receive 50% of any net proceeds Telcordia receives in the future in connection with the prosecution of certain patent rights.

The Company is subject to routine compliance reviews by the IRS and other taxing jurisdictions on various tax matters, which may include challenges to various tax positions the Company has taken. The Company has recorded liabilities for tax contingencies for open years based upon its best estimate of the taxes ultimately expected to be paid. As of April 30, 2005, the income taxes payable balance included $317 million of income taxes payable related to the sale of Telcordia. Of the remaining

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

income taxes payable balance, a significant portion is comprised of tax accruals that have been recorded for tax contingencies. The Company is currently undergoing several routine examinations. While the Company believes it has adequate accruals for tax contingencies, there is no assurance that the tax authorities will not assert that the Company owes taxes in excess of its accruals.

The Company is also involved in various investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in the opinion of the Company’s management, will likely have a material adverse effect on its consolidated financial position, results of operations, or cash flows or ability to conduct business.

Note 12 – Discontinued Operations:

Telcordia

Effective March 15, 2005, the Company completed the sale of Telcordia to TTI Holding Corporation (“Buyer”), an affiliate of Warburg Pincus LLC and Providence Equity Partners Inc. The initial sales price of $1.35 billion was subject to a working capital adjustment, a reduction for the net proceeds from a sale leaseback transaction of certain Telcordia-owned real estate between Telcordia and an unrelated third party in conjunction with the closing of the sale of Telcordia, and other adjustments as agreed upon between the Buyer and the Company as contemplated in the “Stock Purchase Agreement between Science Applications International Corporation and TTI Holding Corporation dated as of November 17, 2004, as amended on February 14, 2005 and March 11, 2005.” The preliminary sales price is subject to final adjustment based on a final closing balance sheet that is agreed to by the Buyer and the Company (“the parties”) or, if the parties cannot agree, determined in accordance with binding arbitration. The preliminary gain on sale before income taxes of $865 million was recorded during the three months ended April 30, 2005 and is based on a preliminary closing balance sheet and estimates of certain closing costs and is expected to be adjusted in future periods based on the final closing balance sheet and actual closing costs. The Company currently is evaluating Telcordia’s proposed closing balance sheet and expects that this process will be completed by the end of its second quarter ending July 31, 2005. For the three months ended April 30, 2005, the preliminary cash proceeds from the sale and net assets sold are as follows:

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

In addition to the cash proceeds received at closing, in the future, the Company is entitled to receive additional amounts as contingent sales price, including all of the net proceeds from any judgment or settlement of the litigation Telcordia initiated against Telkom South Africa and 50% of the net proceeds Telcordia receives in connection with the prosecution of certain patent rights of Telcordia as described in Note 11. The Company has indemnified the Buyer for all income tax obligations on and through the date of close. While the Company believes it has adequate accruals for these tax contingencies, the ultimate resolution of these matters could differ from the amounts accrued. The Company also has customary indemnification obligations owing to the Buyer, as well as an obligation to indemnify the Buyer against any loss Telcordia may incur as a result of an adverse judgment in the Telkom South Africa litigation. All these future contingent payments or contingent purchase price proceeds will continue to be reflected as discontinued operations in the period in which they arise. In addition, as a result of the sale, the Company’s common stock will no longer be an investment choice in the Telcordia 401(k) Plan. As of April 30, 2005, the Telcordia 401(k) Plan held approximately 5.5 million shares of the Company’s common stock, which had a fair value of $233 million. In accordance with the terms of the definitive stock purchase agreement between the Company and the Buyer, the participants in the Telcordia 401(k) Plan must offer for sale their shares of the Company’s common stock held in the Telcordia 401(k) Plan no later than the date of the scheduled April 2006 limited market trade, or any such later trade date as may be agreed by the Company and the Buyer. Although the Company is under no contractual obligation to do so, the Company intends to repurchase these shares of common stock held by the Plan at the stock price in effect at the time of repurchase.

The operating results of Telcordia have been classified as discontinued operations for all periods presented. Telcordia’s results of operations had previously been reported as the Non-Regulated Telecommunications segment for the three months ended April 30, 2004. The summary of Telcordia’s operating results for the period February 1, 2005 through March 14, 2005 and the three months ended April 30, 2004 is as follows:

Assets and liabilities of Telcordia that were held for sale were included in assets of discontinued operations and liabilities of discontinued operations on the condensed consolidated balance sheet at January 31, 2005 and consisted of the following:

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Notes to Condensed Consolidated Financial Statements – (continued)

Unaudited

In addition, included in the liabilities of discontinued operations on the consolidated balance sheet at January 31, 2005 are the following current deferred tax balances related to the Telcordia discontinued operations:

INTESA Joint Venture

In 2003, the Company’s foreign joint venture, INTESA, ceased operations and was classified as discontinued operations. As described in Note 11, during the three months ended April 30, 2004, the Company received an approximate $6 million settlement of an OPIC insurance claim. This claim is considered a recovery of prior losses that were recorded as part of the discontinued operations and, therefore, has been recorded as a gain on discontinued operations of $4 million, net of income tax expense of approximately $2 million. INTESA and the Company are involved in various legal proceedings relating to INTESA as described in Note 11.

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Discontinued Operations

Effective March 15, 2005, we completed the sale of Telcordia to TTI Holding Corporation (“Buyer”), an affiliate of Warburg Pincus LLC and Providence Equity Partners Inc. The initial sales price of $1.35 billion was subject to a working capital adjustment, a reduction for the net proceeds from a sale leaseback transaction of certain Telcordia-owned real estate between Telcordia and an unrelated third party in conjunction with the closing of the sale of Telcordia, and other adjustments as agreed upon between the Buyer and us (“the parties”) as contemplated in the “Stock Purchase Agreement between Science Applications International Corporation and TTI Holding Corporation dated as of November 17, 2004, as amended on February 14, 2005 and March 11, 2005.” The preliminary sales price is subject to final adjustment based on a final closing balance sheet that is agreed to by the parties or, if the parties cannot agree, determined in accordance with binding arbitration. The preliminary gain on sale before income taxes of $865 million was recorded during the three months ended April 30, 2005 and is based on a preliminary closing balance sheet and estimates of certain closing costs and is expected to be adjusted in future periods based on the final closing balance sheet and actual closing costs. We currently are evaluating Telcordia’s proposed closing balance sheet and expect that this process will be completed by the end of our second quarter ending July 31, 2005.

In addition to the cash proceeds received at closing, in the future, we are entitled to receive additional amounts as contingent sales price, including all of the net proceeds from any judgment or settlement of the litigation Telcordia initiated against Telkom South Africa and 50% of the net proceeds Telcordia receives in connection with the prosecution of certain patent rights of Telcordia as described in “Commitments and Contingencies” on page 23. We have indemnified the Buyer for all income tax obligations on and through the date of close. While we believe we have adequate accruals for these tax contingencies, the ultimate resolution of these matters could differ from the amounts accrued. We also have customary indemnification obligations owing to the Buyer, as well as an obligation to indemnify the Buyer against any loss Telcordia may incur as a result of an adverse judgment in the Telkom South Africa litigation. All these future contingent payments or contingent purchase price proceeds will continue to be reflected as discontinued operations in the period in which they arise.

The operating results of Telcordia have been classified as discontinued operations for all periods presented. Telcordia’s results of operations had previously been reported as the Non-Regulated Telecommunications segment for the three months ended April 30, 2004. The summary of Telcordia’s operating results for the period February 1, 2005 through March 14, 2005 and the three months ended April 30, 2004 is as follows:

Overview

We have three reportable segments: Government, Commercial, and Corporate and Other. Business units in our Government 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. Business units in the Commercial segment provide technical services and products primarily to customers in commercial and international markets. Our Corporate and Other segment includes our broker-dealer subsidiary, Bull, Inc., and our real estate subsidiary, Campus Point Realty Corporation. In addition, in certain circumstances, for management purposes as determined by the chief operating decision maker, certain revenue and expense items related to operating business units are excluded from the evaluation of a business unit’s operating performance in the Government or Commercial segment and reflected in the Corporate and Other segment. For further discussion of our segments, refer to Note 2 of the notes to consolidated financial statements in our 2005 Annual Report on Form 10-K.

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The following table highlights key financial data for the three months ended April 30, 2005 and 2004 and as of April 30, 2005 and January 31, 2005:

Our consolidated revenues for the three months ended April 30, 2005 grew 8% over the same period of the prior year with most of the growth coming from our U.S. Government customers. With the sale of Telcordia, our Government segment now represents 93% of our consolidated revenues.

For the three months ended April 30, 2005, our consolidated segment operating income, as defined on page 20, decreased from the same period of the prior year due to an increase in cost of revenues and selling, general and administrative expenses. Cost of revenues increased primarily because of an additional firm fixed price contract loss on our contract with the Greek Government as described in “Commitments and Contingencies” on page 23, and a decrease in direct labor utilization. SG&A expenses increased because of higher expenditures in our information technology and other infrastructure to support current and future growth, and because of higher bid and proposal costs.

Income from continuing operations before income taxes for the three months ended April 30, 2005 increased slightly over the same period of the prior year primarily due to an increase in interest income that offset our lower segment operating income.

Net income for the three months ended April 30, 2005 increased $496 million over the same period of the prior year reflecting a $531 million after-tax gain on the sale of Telcordia, slightly offset by a higher income tax expense on the income from continuing operations.

At April 30, 2005, cash and cash equivalents and short-term investments totaled $3.2 billion. In addition, we had $634 million available under our revolving credit facilities. Notes payable and long-term debt totaled $1.3 billion, with long-term debt maturities primarily between calendar 2012 and 2033.

During the three months ended April 30, 2005, we generated cash of $1.1 billion from discontinued operations as a result of the sale of Telcordia.

Cash flows used in operating activities decreased for the three months ended April 30, 2005 as we used less cash for working capital needs as a result of improvements in our receivables management processes and lower revenue growth for the three months ended April 30, 2005. We expect to generate cash from operating activities during the remainder of the year.

We did not acquire any businesses during the three months ended April 30, 2005. Subsequent to April 30, 2005, we completed an acquisition of a business for a total purchase price of $33 million. We intend to make acquisitions as part of our overall growth strategy and expect that the use of cash in connection with acquisitions will increase in the future.

Repurchases of our common stock increased during the three months ended April 30, 2005 as a result of an increase in the number of shares offered for sale above the number of shares sought to be purchased in our limited market stock trade. We have the right, but are not obligated to purchase shares in the limited market on any trade date. As a result of the sale of Telcordia, repurchases

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of our common stock from 401(k) plans are expected to increase through April 2006 as we intend to repurchase approximately 5.5 million shares held by the Telcordia Technologies 401(k) Savings Plan (“Telcordia 401(k) Plan”). In accordance with the terms of the definitive stock purchase agreement between the Buyer and us, the participants in the Telcordia 401(k) Plan must offer for sale their shares of our common stock held in the Telcordia 401(k) Plan no later than the date of the scheduled April 2006 limited market trade, or any such later trade date as may be agreed by the Buyer and us.

We intend the following discussion and analysis of our financial condition and results of operations to provide information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements. In addition, the following discussion and analysis of financial condition and results of operations focuses on our continuing operations; it, therefore, excludes amounts related to Telcordia and our INTESA joint venture, which are reflected as discontinued operations for all periods presented. For further background explanation on Telcordia and INTESA, refer to Note 12 of the notes to condensed consolidated financial statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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, estimated profitability of long-term contracts, pension benefits, contingencies and litigation. Our estimates and assumptions have been prepared on the basis of the most current available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.

We have several critical accounting policies, which were discussed in our 2005 Annual Report on Form 10-K, 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. During the three months ended April 30, 2005, we have not adopted any new accounting policies that are considered critical accounting policies nor have there been any changes in our critical accounting policies.

Review of Continuing Operations

Revenues

The following table summarizes changes in consolidated and segment revenues on an absolute basis and segment revenues as a percentage of consolidated revenues for the three months ended April 30, 2005 and 2004:

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Consolidated revenues increased for the three months ended April 30, 2005 primarily due to growth in revenues from our U.S. Government customers in our Government segment.

The growth in our Government segment revenues for the three months ended April 30, 2005 was the result of growth in our traditional business areas with departments and agencies of the U.S. Government. Approximately 5% of the growth in revenues for the three months ended April 30, 2005 was a result of acquisitions made after April 30, 2004, while the remaining 3% represented internal growth. We derive a substantial portion of our revenues from the U.S. Government as either a prime contractor or subcontractor, and therefore, 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. 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 that 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.