UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File Number 1-9247

Computer Associates International, Inc.

(631) 342-6000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year,
if changed since last report)

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 Act): Yes þ No ¨.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated condensed balance sheet of Computer Associates International, Inc. and subsidiaries as of December 31, 2004, and the related consolidated condensed statements of operations for the three-month and nine-month periods ended December 31, 2004 and 2003, and the related consolidated condensed statements of cash flows for the nine-month periods ended December 31, 2004 and 2003. These consolidated condensed financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Computer Associates International, Inc. and subsidiaries as of March 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated June 7, 2004, we expressed an unqualified opinion on those consolidated financial statements. As discussed in that report, effective April 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123,” and effective April 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of March 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

New York, New York
February 8, 2005

1

Item 1:

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

See Accompanying Notes to the Consolidated Condensed Financial Statements.

2

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

See Accompanying Notes to the Consolidated Condensed Financial Statements.

3

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

See Accompanying Notes to the Consolidated Condensed Financial Statements.

4

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited Consolidated Condensed Financial Statements of Computer Associates International, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature.

Operating results for the three and nine months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005. For further information, refer to the Company’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K (Form 10-K) for the fiscal year ended March 31, 2004.

ACCPAC Divestiture: In fiscal year 2004, the Company divested its subsidiary, ACCPAC International, Inc. (ACCPAC). As a result, ACCPAC has been classified as a discontinued operation for all periods presented, and its results of operations and cash flow have been reclassified in the Consolidated Condensed Financial Statements. All related footnotes to the Consolidated Condensed Financial Statements have been adjusted to exclude the effect of the operating results of ACCPAC. Refer to Note I, “Divestitures,” for additional information.

Basis of Revenue Recognition: The Company derives revenue from licensing software products, providing customer technical support (referred to as maintenance) and providing professional services, such as consulting and education. The Company licenses to customers the right to use its software products pursuant to software license agreements. Since the Company recognizes subscription revenue from software license agreements evenly (or ratably) over the applicable license agreement term, the timing and amount of such revenue recognized during an accounting period is determined by the license agreement duration and value reflected in each software license agreement. Revenue from sales to distributors, resellers and value-added resellers (VARs) is recognized when those partners sell the software products to their customers. Beginning July 1, 2004, certain sales of products to distributors, resellers and VARs incorporate the right to receive certain unspecified future software products and revenue from those contracts is therefore recognized on a ratable basis. Revenue from professional services arrangements is generally recognized as the services are performed; however, committed professional services arrangements that are sold with software product licenses are recognized on a ratable basis over the life of the software arrangement. For a more detailed description of the Company’s revenue recognition policy, refer to Note 1, “Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements in the Company’s Form 10-K for the fiscal year ended March 31, 2004.

Business Model: Under the Company’s Business Model, which was adopted in October 2000, software license agreements include flexible contractual provisions that, among other things, allow customers to receive unspecified future software products without additional fees. These agreements combine the right to use the software product with maintenance for the term of the agreement. Under these agreements, once all four of the revenue recognition criteria of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants, are met, the Company is required to recognize revenue ratably over the term of the license agreement. For license agreements signed prior to October 2000 (under the prior business model), once all four of the revenue recognition criteria were met, software license fees were recognized as revenue up-front, and the maintenance fees were deferred and subsequently recognized as revenue over the term of the license. For a detailed description of the Company’s Business Model, refer to Item 1, “Business” in the Company’s Form 10-K for the fiscal year ended March 31, 2004.

5

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

Cash Dividends: In October 2004, the Company’s Board of Directors declared a regular, semi-annual cash dividend of $0.04 per share. The dividend totaled approximately $24 million and was paid on January 5, 2005 to stockholders of record as of December 20, 2004.

Statement of Cash Flows: For the nine-month periods ended December 31, 2004 and 2003, interest payments were $103 million and $119 million, respectively, and income taxes paid were $54 million and $222 million, respectively. The decrease in taxes paid in the current period was primarily attributable to a new Internal Revenue Service (IRS) Revenue Procedure, which grants taxpayers a limited deferral for certain receipts of advance payments to the extent such advance payments were not recognized in revenue for financial statement purposes.

NOTE B – NET EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share and diluted loss per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing (i) the sum of net income and the after-tax amount of interest expense recognized in the period associated with Convertible Senior Notes that are dilutive by (ii) the sum of the weighted-average number of common shares outstanding for the period plus dilutive common share equivalents.

6

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

NOTE C – COMPREHENSIVE INCOME

     Comprehensive income includes unrealized gains (losses) on the Company’s available-for-sale securities, net of related tax, and foreign currency translation adjustments. The components of comprehensive income for the three-month and nine-month periods ended December 31, 2004 and 2003 are as follows:

NOTE D – ACCOUNTING FOR STOCK-BASED COMPENSATION

Prior to April 1, 2003, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.

Effective April 1, 2003, the Company adopted, on a prospective basis, the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.”

The Company recognizes compensation expense computed under the fair value recognition provisions of SFAS No. 123 related to all stock awards granted after March 31, 2003. The Company recognized pre-tax stock-based compensation in the following line items on the Consolidated Condensed Statements of Operations for the periods indicated:

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share — Based Payment (SFAS No. 123(R)).” SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their consolidated financial statements. The Company’s initial adoption of SFAS No. 123(R) may result in additional reported expense because of the requirement to adopt either a modified prospective method or a modified retrospective method to transition to the new standard. Both methods differ from the method applied when the Company adopted SFAS No. 123 in fiscal year 2004. The Company is not required to begin applying the provisions of SFAS No. 123(R) until the second quarter of fiscal year 2006. The Company is in the process of assessing the impact of the pronouncement’s requirements on its financial statements.

7

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

     The following table illustrates the pro forma effect on net income (loss) and basic and dilutive earnings (loss) per share as if the fair value method had been applied to all stock-based employee awards:

The compensation expense and pro forma net income (loss) are not necessarily indicative of future period amounts.

Options covering 380,000 shares, including options covering 350,000 shares for an executive, were granted in the quarter ended December 31, 2004 with a weighted average fair value of $16.56. The weighted average fair value at the date of grant for options granted during the nine-month periods ended December 31, 2004 and 2003 was $15.94 and $12.32, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions that were used for option grants in the respective periods are as follows:

During the third quarter of fiscal year 2005, the Company modified certain terms of an executive employee option agreement covering 235,000 shares. The modification provided for acceleration of vesting and extension of the exercise period upon termination in accordance with specific terms outlined in the employment agreement. The modification terms resulted in a recalculation of the fair value, which will be amortized over the expected life of the modified award. The fair values at the date of grant and the date of modification were $14.55 and $17.37,respectively. The fair values were estimated using the Black-Scholes option pricing model.

8

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

During the three-month and nine-month periods ended December 31, 2004, the Company issued 200,000 and 614,360 shares, respectively, of restricted stock and restricted stock units to certain employees of the Company. The 200,000 shares granted in the three-month period ended December 31, 2004 were to an executive, of which the value of 100,000 shares was recognized as an expense in December 2004. The weighted average fair values at the date of grant for the restricted shares issued in the three-month and nine-month periods ended December 31, 2004 were $30.11 and $25.98, respectively.

The Company maintains a Year 2000 Employee Stock Purchase Plan (the Purchase Plan) for all eligible employees. The estimated fair value of the stock purchase rights under the Purchase Plan for the six-month offer period commencing July 1, 2004 was $6.54. The fair value is estimated on the first date of the offering period using the Black-Scholes option pricing model. The weighted average assumptions that were used in determining the estimated fair value of stock purchase rights under the Purchase Plan are as follows:

The Company completed its acquisition of Netegrity, Inc. (Netegrity) during the quarter ended December 31, 2004. Pursuant to the merger agreement, options to purchase Netegrity common stock were converted (using a ratio of .3573) into options to purchase approximately 1.4 million shares of CA stock. The weighted average fair value of the options on the date of acquisition was $20.19. The fair value of each option grant was estimated on the date of acquisition using the Black-Scholes option pricing model with input assumptions similar to those used for CA stock options granted during the three-month period ended December 31, 2004.

Refer to Note J, “Acquisitions,” for additional information concerning the Company’s acquisition of Netegrity.

NOTE E – ACCOUNTS RECEIVABLE

Net trade and installment accounts receivable represent financial assets derived from the committed amounts due from customers that have been earned by the Company and consist of the following:

9

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

The components of unearned revenue consist of the following:

NOTE F – INTANGIBLE ASSETS

The carrying value of goodwill was $4.599 billion and $4.366 billion as of December 31, 2004 and March 31, 2004, respectively. During the nine-month period ended December 31, 2004, goodwill increased by approximately $302 million and $15 million related to the acquisitions of Netegrity and PestPatrol, respectively. The increase was partially offset by a reduction of approximately $86 million due primarily to adjustments to net operating losses and other future tax benefits which were finalized in the quarter ended December 31, 2004 related to the acquisition of PLATINUM technology International, inc.

In the table below, capitalized software includes both purchased and internally developed software costs; other identified intangible assets include both purchased customer relationships and trademarks/trade name costs. Internally developed capitalized software costs and other identified intangible asset costs are included in “Other noncurrent assets, net” on the Consolidated Condensed Balance Sheets.

10

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

The gross carrying amounts and accumulated amortization for identified intangible assets are as follows:

In connection with the acquisition of Netegrity in November 2004, the Company recognized approximately $37 million and $67 million in purchased software and other identified intangible assets, respectively. Refer to Note J, “Acquisitions,” for additional information relating to the Netegrity acquisition.

In connection with the acquisition of PestPatrol in August 2004, the Company recognized approximately $40 million in purchased software. Refer to Note J, “Acquisitions,” for additional information relating to the PestPatrol acquisition.

For the third quarters of fiscal years 2005 and 2004, amortization of capitalized software costs was $112 million and $116 million, respectively. Amortization of other identified intangible assets was $10 million in each quarter.

For the first nine months of fiscal years 2005 and 2004, amortization of capitalized software costs was $335 million and $349 million, respectively, and amortization of other identified intangible assets was $30 million and $29 million, respectively.

Based on the identified intangible assets recorded through December 31, 2004, annual amortization expense is expected to be as follows:

11

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

NOTE G – OTHER LOSSES, NET

The components of “Other losses, net” are as follows:

NOTE H – RECLASSIFICATIONS

Certain prior period balances have been reclassified to conform to the current period presentation.

Approximately $8 million of deferred maintenance revenue at March 31, 2004, related to the Company’s indirect business (distributors, resellers, and VARs), has been reclassified from “Billed accounts receivable,” a component of “Trade and installment accounts receivable, net” to “Deferred maintenance revenue” on the Consolidated Condensed Balance Sheet to conform to the December 31, 2004 presentation.

NOTE I – DIVESTITURES

In March 2004, the Company sold its interest in ACCPAC to The Sage Group, plc. The Company’s net proceeds totaled $104 million for all of the outstanding equity interests of ACCPAC. The Company received approximately $90 million of the net proceeds in fiscal year 2004 and the remainder in the first quarter of fiscal year 2005. The sale completed the Company’s multi-year effort to exit the business applications market. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of ACCPAC have been recorded as discontinued operations for all periods presented. The operating results of the ACCPAC discontinued operation are summarized as follows:

In the fourth quarter of fiscal year 2004, the Company recorded a gain on the disposition of ACCPAC of $60 million, net of tax. In the second quarter of fiscal year 2005, the Company recorded an adjustment to the gain on disposal of $2 million, net of tax.

12

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

NOTE J – ACQUISITIONS

During the third quarter of fiscal year 2005, the Company acquired the common stock of Netegrity in a cash transaction of approximately $439 million. In addition, the Company acquired options to acquire the common stock of Netegrity and incurred acquisition costs of approximately $9 million and $5 million, respectively, for an aggregate purchase price of approximately $453 million. Netegrity was a provider of business security software, principally in the areas of identity and access management, and the Company has made Netegrity’s identity and access management solutions available both as independent products and as integrated components of the Company’s eTrust Identity and Access Management Suite. The acquisition of Netegrity has been accounted for as a purchase and, accordingly, its results of operations have been included in the Consolidated Condensed Financial Statements since the date of its acquisition, November 24, 2004. The acquisition cost of Netegrity has been allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition as follows:

Purchased software products and customer relationships will be amortized over 7 years and 12 years, respectively. The Netegrity acquisition contributed approximately $15 million of revenue for the three- month and nine-month periods ended December 31, 2004.

The Company has not yet completed its analysis of the purchase price allocation related to the Netegrity acquisition. In particular, the analysis of the fair value of acquired net operating losses (NOLs) is not yet complete. Such analysis is expected to be completed by the third quarter of fiscal year 2006 and adjustments to the purchase price allocation, if any, will be made at that time.

During the second quarter of fiscal year 2005, the Company acquired PestPatrol, a privately held provider of anti-spyware solutions for approximately $40 million. This acquisition, which was integrated into the Company’s eTrust Threat Management software product portfolio, did not have a material impact on the Company’s financial results for either the three-month or nine-month periods ended December 31, 2004.

The Company acquired several businesses prior to fiscal year 2000. Other than Netegrity, the Company did not complete any acquisitions after March 2000 that generated additional acquisition-related liabilities. Accrued acquisition-related costs and changes in these accruals were as follows:

13

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

The duplicate facilities and other costs relate to operating leases which expire at various times through 2010, negotiated buyouts of operating lease commitments, taxes, and other contractual liabilities. The employee costs consist of involuntary termination benefits. The adjustments, which reduced the corresponding liability and related goodwill asset accounts, relate to obligations that were settled at amounts less than originally estimated. The remaining liability balances are included in “Accrued expenses and other current liabilities” on the Consolidated Condensed Balance Sheets.

NOTE K – RESTRUCTURING PLAN

In September 2004, the Company announced a restructuring plan to more closely align its resources with strategic growth opportunities. The plan included a workforce reduction of approximately five percent or 800 positions worldwide, primarily all of which have been completed as of December 31, 2004. The Company anticipates the total restructuring plan will cost approximately $35 million related to severance and associated benefits. As of the third quarter of fiscal year 2005, approximately $28 million of this cost has been expensed, with the remaining amount expected to be incurred by the end of the fiscal year or shortly thereafter. As of December 31, 2004, the Company has paid approximately $20 million under the restructuring plan. The remaining liability is included in “Accrued expenses and other current liabilities” on the Consolidated Condensed Balance Sheets.

NOTE L – CONTINGENCIES

Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004

The Company, its former Chairman and CEO Charles B. Wang, its former Chairman and CEO Sanjay Kumar, and its Executive Vice President Russell M. Artzt were defendants in a number of stockholder class action lawsuits, the first of which was filed July 23, 1998, alleging that a class consisting of all persons who purchased the Company’s Common Stock during the period from January 20, 1998 until July 22, 1998 were harmed by misleading statements, misrepresentations, and omissions regarding the Company’s future financial performance. These cases, which sought monetary damages, were consolidated into a single action in the United States District Court for the Eastern District of New York (the “Federal Court”), the proposed class was certified, and discovery was completed. Additionally, in February and March 2002, a number of stockholder lawsuits were filed in the Federal Court against the Company and Messrs. Wang, Kumar, Ira H. Zar, the Company’s former Chief Financial Officer, and in one instance, Mr. Artzt. The lawsuits generally alleged, among other things, that the Company made misleading statements of material fact or omitted to state material facts necessary in order to make the statements, in light of the circumstances under which they were made, not misleading in connection with the Company’s financial performance. Each of the named individual plaintiffs in the 2002 lawsuits sought to represent a class consisting of purchasers of the Company’s Common Stock and call options and sellers of put options for the period from May 28, 1999, through February 25, 2002. The 2002 cases were consolidated, and the Company’s former independent auditor, Ernst & Young LLP, was named as a defendant. In addition, in May 2003, a class action lawsuit captioned John A. Ambler v. Computer Associates International, Inc., et al. was filed in the Federal Court. The complaint in this matter, a purported class action on behalf of the Computer Associates Savings Harvest Plan (the “CASH Plan”) and the participants in, and beneficiaries of the CASH Plan for a class period running from March 30, 1998, through May 30, 2003, asserted claims of breach of fiduciary duty under ERISA, the federal Employee Retirement Income Security Act. The named defendants were the Company, the Company’s Board of Directors, the CASH Plan, the Administrative Committee of the CASH Plan, and the following current or former employees and/or directors of the Company: Charles B. Wang; Sanjay Kumar; Ira Zar; Russell M. Artzt; Peter A. Schwartz; Charles P. McWade; and various unidentified alleged fiduciaries of the CASH Plan. The complaint alleged that the defendants breached their fiduciary duties by causing the CASH Plan to invest in Company securities and sought damages in an unspecified amount.

14

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

A derivative lawsuit was filed against certain current and former directors of the Company, based on essentially the same allegations as those contained in the February and March 2002 stockholder lawsuits discussed above. This action was commenced in April 2002 in Delaware Chancery Court, and an amended complaint was filed in November 2002. The defendants named in the amended complaints were the Company as a nominal defendant, current Company directors Messrs. Artzt, Lewis S. Ranieri, and Alfonse M. D’Amato, and former Company directors Ms. Shirley Strum Kenny and Messrs. Wang, Kumar, Willem de Vogel, Richard Grasso, and Roel Pieper. The derivative suit alleged breach of fiduciary duties on the part of all the individual defendants and, as against the current and former management director defendants, insider trading on the basis of allegedly misappropriated confidential, material information. The amended complaints sought an accounting and recovery on behalf of the Company of an unspecified amount of damages, including recovery of the profits allegedly realized from the sale of Common Stock of the Company.

On August 25, 2003, the Company announced the settlement of all outstanding litigation related to the above-referenced stockholder and derivative actions as well as the settlement of an additional derivative action filed in the Federal Court in connection with the settlement. As part of the class action settlement, which was approved by the Federal Court in December 2003, the Company agreed to issue a total of up to 5.7 million shares of Common Stock to the shareholders represented in the three class action lawsuits, including payment of attorneys’ fees. In January 2004, approximately 1.6 million settlement shares were issued along with approximately $3.3 million to the plaintiffs’ attorneys for attorney fees and related expenses. In March 2004, approximately 0.2 million settlement shares were issued to participants and beneficiaries of the CASH Plan. On October 8, 2004, the Federal Court signed an order approving the distribution of the remaining 3.8 million settlement shares, less administrative expenses. The order was amended in December 2004. The Company issued the remaining 3.8 million settlement shares in December 2004. Of the 3.8 million settlement shares, approximately 51,000 were used for the payment of administrative expenses in connection with the settlement, approximately 76,000 were liquidated for cash distributions to class members entitled to receive a cash distribution and the remaining settlement shares were distributed to class members entitled to receive a distribution of shares.

In settling the derivative suit, which settlement was also approved by the Federal Court in December 2003, the Company committed to maintain certain corporate governance practices. Under the settlement, the Company and the individual defendants were released from any potential claim by shareholders relating to accounting-related or other public statements made by the Company or its agents from January 1998 through February 2002 (and from January 1998 through May 2003 in the case of the employee ERISA action), and the individual defendants were released from any potential claim by the Company or its shareholders relating to the same matters. Ernst & Young LLP is not a party to the settlement. The settlement was reviewed by the independent directors who chair the Corporate Governance, Audit, and Compensation and Human Resource Committees of the Board of Directors as well as by all non-interested, independent directors who were not named in any of the suits. It was also approved by the Board’s independent directors as a whole.

On October 5 and December 9, 2004, two purported Company shareholders filed motions to vacate the Order of Final Judgment and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of the derivative action. These motions primarily seek to void the releases that were granted to the individual defendants under the settlement. On December 7, 2004, a motion to vacate the Order of Final Judgment and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of the 1998 and 2002 stockholder lawsuits discussed above was filed by Sam Wyly and certain related parties. The motion seeks to reopen the settlement to permit the moving shareholders to pursue individual claims against certain present and former officers of the Company. The motion states that the moving shareholders do not seek to file claims against the Company. These motions are in the process of being briefed and are currently scheduled to be submitted to the Federal Court on March 11, 2005.

15

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

The Government Investigation

In 2002, the United States Attorney’s Office for the Eastern District of New York (USAO) and the staff of the Northeast Regional Office of the Securities Exchange Commission (SEC) commenced an investigation concerning certain of the Company’s past accounting practices, including the Company’s revenue recognition procedures in periods prior to the adoption of the Company’s Business Model in October 2000.

In response to the investigation, the Board of Directors authorized the Audit Committee to conduct an independent investigation into the timing of revenue recognition by the Company. On October 8, 2003, the Company reported that the ongoing investigation by the Audit Committee had preliminarily found that revenues were prematurely recognized in the fiscal year ended March 31, 2000, and that a number of software license agreements appeared to have been signed after the end of the quarter in which revenues associated with such software license agreements had been recognized in that fiscal year. Those revenues, as the Audit Committee found, should have been recognized in the quarter in which the software license agreements were signed. Those preliminary findings were reported to government investigators.

Following the Audit Committee’s preliminary report and at its recommendation, the Company asked for and received the resignations of four executives who oversaw the relevant financial operations during the period in question, including the Company’s then Chief Financial Officer, Ira Zar. On January 22, 2004, one of these individuals pleaded guilty to federal criminal charges of conspiracy to obstruct justice in connection with the ongoing investigation. On April 8, 2004, Mr. Zar and two other executives pleaded guilty to charges of conspiracy to obstruct justice and conspiracy to commit securities fraud in connection with the investigation, and Mr. Zar also pleaded guilty to committing securities fraud. The SEC filed related actions against each of the four executives alleging that they participated in a widespread practice that resulted in the improper recognition of revenue by the Company. Without admitting or denying the allegations in the complaints, Mr. Zar and two other executives each consented to a permanent injunction against violating, or aiding and abetting violations of, the securities laws, and also to a permanent bar from serving as an officer or director of a publicly held company. Litigation against the four executives with respect to the SEC’s claims for disgorgement and penalties is continuing.

A number of other employees, primarily in the Company’s legal and finance departments were terminated or resigned as a result of matters under investigation by the Audit Committee, including Steven Woghin, the Company’s former General Counsel. Stephen Richards, the Company’s former Executive Vice President of Sales, resigned from his position and was relieved of all duties in April 2004, and left the Company at the end of June 2004. Additionally, on April 21, 2004, Sanjay Kumar resigned as Chairman, a director and Chief Executive Officer of the Company, and assumed the role of Chief Software Architect. Thereafter, Mr. Kumar resigned from the Company effective June 30, 2004.

In April 2004, the Audit Committee completed its investigation and determined that the Company should restate certain financial data to properly reflect the timing of the recognition of license revenue for the Company’s fiscal years ended March 31, 2001 and 2000. The Audit Committee believes that the Company’s financial statements under its current Business Model are unaffected by the improper accounting practices that were in place prior to the adoption of the Business Model in October 2000 and that had resulted in the restatement, and that the historical issues it had identified in the course of its independent investigation concerned the premature recognition of revenue. The Company continues to implement and consider additional remedial actions it deems necessary.

On September 22, 2004, the Company reached agreements with the USAO and the SEC by entering into a Deferred Prosecution Agreement (the “DPA”) with the USAO and the SEC’s filing of a Final Consent Judgment in the Federal Court. The Federal Court approved the DPA on September 22, 2004 and entered the Final Consent Judgment on September 28, 2004. The agreements resolve the USAO and SEC

16

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

investigations into certain of the Company’s past accounting practices, including its revenue recognition policies and procedures, and obstruction of their investigations.

Pursuant to the DPA, the Company has agreed to establish a $225 million fund for purposes of restitution to current and former stockholders of the Company, with $75 million to be paid within 30 days of the date of approval of the DPA by the Court, $75 million to be paid within one year after the approval date and $75 million to be paid within 18 months after the approval date. These funds are to be distributed by a Fund Administrator, proposed by the Company and approved by the USAO under a process commencing within 30 days of the date of approval of the DPA by the Court, pursuant to the Fund Administrator’s “Restitution Plan,” to be approved by the USAO and the Court under a process to commence within six months after the Fund Administrator’s appointment. The Company has made the first $75 million payment and Kenneth Feinberg has been appointed as Fund Administrator. The payment of these restitution funds is in addition to the amounts, payable in Company’s shares and/or cash, that the Company previously agreed to provide current and former stockholders in settlement of certain private litigation in August 2003 (refer to “Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004”). The Company has also agreed, among other things, to take the following actions by December 31, 2005: (1) adding a minimum of two new independent directors to its Board of Directors; (2) establishing a Compliance Committee of the Board of Directors; (3) implementing an enhanced compliance and ethics program, including appointing a Chief Compliance Officer; and (4) reorganizing its Finance and Internal Audit Departments. The Company has since appointed a Chief Compliance Officer. Under the DPA and the Final Consent Judgment, the Company has further agreed to appoint an Independent Examiner to examine the Company’s practices for the recognition of software license revenue, its ethics and compliance policies and other matters. The Independent Examiner will also review the Company’s compliance with the DPA and will report its findings and recommendations to the USAO, SEC and Board of Directors within six months after appointment and quarterly thereafter. The Independent Examiner must be approved by the USAO, the SEC and the Court, and will serve for a term of 18 months after appointment, subject to extension by the USAO and SEC.

Pursuant to the DPA, the USAO will defer and subsequently dismiss prosecution of a two-count information filed against the Company charging it with committing securities fraud and obstruction of justice if the Company abides by the terms of the DPA, which currently is set to expire within 30 days after the 18-month term of the DPA which begins to run on the date of the Court’s order approving the appointment of the Independent Examiner or at the time the Independent Examiner’s term of engagement is completed, whichever is later. In certain circumstances the term of the DPA may be extended. Pursuant to the Final Consent Judgment with the SEC, the Company is permanently enjoined from violating Section 17(a) of the Securities Act of 1933 (the “Securities Act”), Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-1 and 13a-13 under the Exchange Act. Pursuant to the DPA, the Company has also agreed to comply in the future with federal criminal laws, including securities laws. In addition, the Company has agreed not to make any public statement, in litigation or otherwise, contradicting its acceptance of responsibility for the accounting and other matters that are the subject of the investigations, or the related allegations by the USAO, as set forth in the DPA.

Under the DPA and the Final Consent Judgment, the Company also is required to cooperate fully with the USAO and SEC concerning their ongoing investigations into the misconduct of any present or former employees of the Company. The Company has also agreed to fully support efforts by the USAO and SEC to obtain disgorgement of compensation from any present or former officer of the Company who engaged in any improper conduct while employed at the Company.

After the Independent Examiner’s term expires, the USAO will seek to dismiss its charges against the Company. However, the Company shall be subject to prosecution at any time if the USAO determines that the Company has deliberately given materially false, incomplete or misleading information pursuant

17

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

to the DPA, has committed any federal crime after the date of the DPA or has knowingly, intentionally and materially violated any provision of the DPA (including any of those described above). Also, as indicated above, the USAO and SEC may require that the term of the DPA be extended beyond 18 months.

Also on September 22, 2004, Steven Woghin, the Company’s former General Counsel, pled guilty to conspiracy to commit securities fraud and obstruction of justice under a two-count information filed against him by the USAO. The SEC also filed a complaint against Mr. Woghin alleging that he violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder. The complaint further alleged that under Section 20(e) of the Exchange Act, Mr. Woghin aided and abetted the Company’s violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Mr. Woghin consented to a partial judgment imposing a permanent injunction against him from committing such violations in the future and a permanent bar from being an officer or director of a public company. The SEC’s claims for disgorgement and civil penalties against Mr. Woghin are pending.

Additionally on September 22, 2004, the SEC filed complaints against Sanjay Kumar and Stephen Richards alleging that they violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder. The complaints further alleged that under Section 20(e) of the Exchange Act, Messrs. Kumar and Richards aided and abetted the Company’s violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.

On September 23, 2004, the USAO filed a ten-count indictment charging Messrs. Kumar and Richards with conspiracy to commit securities fraud and wire fraud, committing securities fraud, filing false SEC filings, conspiracy to obstruct justice and obstruction of justice. Additionally, Mr. Kumar was charged with one count of making false statements to an agent of the Federal Bureau of Investigation and Mr. Richards was charged with one count of perjury in connection with sworn testimony before the SEC.

The Company continues to cooperate with the USAO and the staff of the SEC in connection with their ongoing investigation of individuals who were involved in the Company’s past improprieties. The Company’s Board of Directors is continuing to review the matter of compensation paid or due to individuals subject to the investigation, and possibly other persons. The Board intends to take such action as it deems in the best interests of the Company and its stockholders in relation to such compensation.

Derivative Actions Filed in 2004

In June 2004, a purported derivative action was filed in the Federal Court by Ranger Governance Ltd. against certain current or former employees and/or directors of the Company. In July 2004, two additional purported derivative actions were filed in the Federal Court by Company shareholders against certain current or former employees and/or directors of the Company. In November 2004, the Federal Court issued an order consolidating these three derivative actions. The plaintiffs filed a consolidated amended complaint (the “Consolidated Complaint”) on January 7, 2005. The Consolidated Complaint names as defendants Charles B. Wang; Sanjay Kumar; Ira H. Zar; David Kaplan; David Rivard; Lloyd Silverstein; Russell M. Artzt; Alfonse D’Amato; Stephen Richards; Michael A. McElroy; Charles P. McWade; Peter A. Schwartz; Gary Fernandes; Robert E. La Blanc; Lewis S. Ranieri; Jay W. Lorsch; Kenneth Cron, Walter P. Schuetze; Willem deVogel; Richard Grasso, Roel Pieper, Steven Woghin; KPMG LLP; and Ernst & Young LLP. The Company is named as a nominal defendant. The Consolidated Complaint alleges a claim against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, deVogel, Grasso, Pieper and Woghin for contribution towards the consideration the Company had previously agreed to provide current and former stockholders in

18

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

settlement of certain class action litigation commenced against the Company and certain officers and directors in 1998 and 2002 (refer to “Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004”) as well as all damages suffered by the Company in connection with the USAO and SEC investigations (refer to “The Government Investigation”). The Consolidated Complaint also alleges a claim seeking unspecified relief against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, deVogel and Woghin for violations of Section 14(a) of the Exchange Act for alleged false and material misstatements made in the Company’s proxy statements issued in 2002 and 2003. The Consolidated Complaint also alleges breach of fiduciary duty by Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, deVogel, Grasso, Pieper and Woghin. The Consolidated Complaint also seeks unspecified compensatory, consequential and punitive damages against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, deVogel, Grasso, Pieper and Woghin based upon allegations of corporate waste and fraud. The Consolidated Complaint also seeks unspecified damages against Ernst & Young LLP and KPMG LLP, for breach of fiduciary duty and the duty of reasonable care, as well as contribution and indemnity under Section 14(a) of the Exchange Act. The Consolidated Complaint requests restitution and rescission of the compensation earned under the Company’s executive compensation plan by Messrs. Artzt, Kumar, Richards, Zar, Woghin, Kaplan, Rivard, Silverstein, Wang, McElroy, McWade and Schwartz. Additionally, pursuant to Section 304 of the Sarbanes-Oxley Act, the Consolidated Complaint seeks reimbursement of bonus or other incentive-based equity compensation received by defendants Wang, Kumar, Schwartz and Zar, as well as alleged profits realized from their sale of securities issued by the Company during the time periods they served as the Chief Executive Officer (Wang and Kumar) and Chief Financial Officer (Ira Zar) of the Company, respectively. On February 1, 2005, the Company established a Special Litigation Committee of independent members of its Board of Directors to control and determine the Company’s response to this litigation.

On August 9, 2004, a petition was filed by Sam Wyly and Ranger Governance, Ltd. against the Company in the District Court of Dallas County, Texas, seeking to obtain a declaratory judgment that plaintiffs did not breach two separation agreements they entered into with the Company in 2002 under which plaintiffs agreed to forgo proxy challenges for a period of five years in exchange for the Company’s agreement to undertake certain corporate governance reforms. Plaintiffs seek to obtain this declaratory judgment in order to commence a derivative suit on behalf of the Company. On September 3, 2004, the Company filed an answer to the petition and on September 10, 2004, the Company filed a notice of removal seeking to remove the action to federal court (where the action is currently pending). The Company subsequently moved to transfer the action to the United States District Court for the Eastern District of New York. That motion is still pending.

The Company is obligated to indemnify its officers and directors under certain circumstances to the fullest extent permitted by Delaware law. As a part of that obligation, the Company has advanced and will continue to advance certain attorneys’ fees and expenses incurred by current and former officers and directors in various litigations arising out of similar allegations, including the litigation described above.

Other Civil Actions

In June 2004, a lawsuit captioned Scienton Technologies, Inc. et al. v. Computer Associates International, Inc., was filed in the Federal Court. The complaint seeks monetary damages based upon claims for, among other things, breaches of contract, misappropriation of trade secrets, and unfair competition. The Company’s investigation of this matter is in its early stages. Although the ultimate outcome cannot be determined, the Company believes that the claims are unfounded and that the Company has meritorious defenses. In the opinion of management, the resolution of this lawsuit is not expected to have a material adverse effect on the financial position of the Company.

19

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

In September 2004, two complaints to compel production of the Company’s books and records, including files that have been produced by the Company to the USAO and SEC in the course of their joint investigation of the Company’s accounting practices (refer to “The Government Investigation”) were filed by two purported shareholders of the Company in Delaware Chancery Court pursuant to Section 220 of the Delaware General Corporation Law. The first complaint was filed on September 15, 2004, after the Company denied the purported shareholder access to some of the files requested in her initial demand, in particular files that had been produced by the Company to the USAO and SEC during the course of their joint investigation. This complaint concerns the inspection of certain Company documents to determine whether the Company has been involved in obstructing the joint investigation by the USAO and SEC and whether certain Company employees have breached their fiduciary duties to the Company and wasted corporate assets; these individuals include Sanjay Kumar, Charles Wang, Ira H. Zar, Lloyd Silverstein, Steven M. Woghin, Stephen Richards, Russell Artzt, Kenneth Cron, Alfonse D’Amato, Robert La Blanc, Lewis S. Ranieri, Jay Lorsch, Walter Schuetze, Alex Serge Vieux, Gary Fernandes, Willem de Vogel, Shirley Strum Kenny, Richard Grasso and Irving Goldstein. The second complaint, filed on September 21, 2004, concerns the inspection of documents related to Mr. Kumar’s compensation and the independence and ability of the Company’s Board of Directors to sue for return of that compensation. The Company filed answers to these complaints on October 15, 2004.

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

NOTE M – INCOME TAXES

The income tax expense from continuing operations for the three-month period ended December 31, 2004 includes a tax benefit of approximately $4 million resulting from the settlement of an IRS audit that was completed for the three-year period ending March 2000 and other matters from prior years.

The income tax benefit from continuing operations for the nine-month period ended December 31, 2004 includes the $4 million tax benefit described above and a $26 million tax benefit recognized in September 2004 attributable to an IRS refund received for additional tax benefits arising from foreign export sales in prior fiscal years.

NOTE N – SENIOR DEBT OFFERING AND 2004 CREDIT FACILITY

In November 2004, the Company issued an aggregate of $1 billion of unsecured Senior Notes (2005 Senior Notes) in a transaction pursuant to Rule 144A under the Securities Act of 1933 (Rule 144A). The Company issued $500 million of 4.75%, 5-year notes due November 2009 and $500 million of 5.625%, 10-year notes due November 2014. The Company has the option to redeem the 2005 Senior Notes at any time, at redemption prices equal to the greater of (i) 100% of the aggregate principal amount of the notes of such series being redeemed and (ii) the present value of the principal and interest payable over the life of the 2005 Senior Notes, discounted at a rate equal to 15 basis points and 20 basis points for the 5-year notes and 10-year notes, respectively, over a comparable U.S. Treasury bond yield. The maturity of the 2005 Senior Notes may be accelerated by the holders upon certain events of default, including failure to make payments when due and failure to comply with covenants in the 2005 Senior Notes. The 5-year notes were issued at a price equal to 99.861% of the principal amount and the 10-year notes at a price equal to 99.505% of the principal amount for resale under Rule 144A and Regulation S. The Company also agreed for the benefit of the holders to register the 2005 Senior Notes under the Securities Act of 1933 so that the 2005 Senior Notes may be sold in

20

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

the public market. If the Company does not meet certain deadlines for filing and effectiveness of the registration statement, the interest rate on the 2005 Senior Notes will increase by 25 basis points for up to 90 days and by an additional 25 basis points thereafter, until the delay is cured.

It is the Company’s intention to use the net proceeds from this issuance to repay the $825 million of the 6.375% Senior Notes that are due in April 2005. The remaining net proceeds will be used for general corporate purposes.

The Company capitalized the transaction fees associated with the 2005 Senior Notes, which totaled approximately $6 million. These fees are being amortized over the period through maturity of the 2005 Senior Notes in the “Interest expense, net” line item on the Consolidated Condensed Statement of Operations.

In December 2004, the Company entered into an unsecured, revolving credit facility (the 2004 Revolving Credit Facility). The new credit facility replaces the 2002 Revolving Credit Facility that was due to expire in January 2005; that facility was terminated effective December 2, 2004 and was undrawn as of that date. The maximum amount that may be outstanding at any time under the 2004 Revolving Credit Facility is $1 billion. The 2004 Revolving Credit Facility expires in December 2008 and no amount was drawn as of December 31, 2004.

Borrowings under the 2004 Revolving Credit Facility will bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowings and will be calculated according to a base rate or a Eurocurrency rate, as the case may be, plus an applicable margin and utilization fee. Depending on the Company’s credit rating at the time of borrowing, the applicable margin can range from 0% to 0.325% for a base rate borrowing and from 0.50% to 1.325% for a Eurocurrency borrowing, and the utilization fee can range from 0.125% to 0.250%. At the Company’s current credit ratings, the applicable margin would be 0% for a base rate borrowing and 0.70% for a Eurocurrency borrowing, and the utilization fee would be 0.125%. In addition, the Company must pay facility fees quarterly at rates dependent on the Company’s credit ratings. Depending on the Company’s credit rating, the facility fees can range from 0.125% to 0.30% of the aggregate amount of each lender’s full revolving credit commitment (without taking into account any outstanding borrowings under such commitments). At the Company’s current credit ratings, the facility fee is 0.175% of the aggregate amount of each lender’s revolving credit commitment.

The 2004 Revolving Credit Facility Agreement contains customary covenants for transactions of this type, including two financial covenants: (i) for the 12-months ending each quarter-end, the ratio of consolidated debt for borrowed money to consolidated cash flow, each as defined in the Credit Agreement, must not exceed 3.25 for the quarter ending December 31, 2004 and 2.75 for quarters ending March 31, 2005 and thereafter; and (ii) for the 12-months ending each quarter-end, the ratio of consolidated cash flow to the sum of interest payable on, and amortization of debt discount in respect of, all consolidated debt for borrowed money, as defined in the Credit Agreement, must not be less than 5.00. In addition, as a condition precedent to each borrowing made under the Credit Agreement, as of the date of such borrowing, (i) no event of default shall have occurred and be continuing and (ii) the Company is to reaffirm that the representations and warranties made in the Credit Agreement (other than the representation with respect to material adverse changes, but including the representation regarding the absence of certain material litigation) are correct.

The Company capitalized the transaction fees associated with the 2004 Revolving Credit Facility, which totaled approximately $6 million. The Company is amortizing these fees over the four year term of the 2004 Revolving Credit Facility to “Interest expense, net” on the Consolidated Condensed Statements of Operations.

21

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2004

NOTE O – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R). Refer to Note D, “Accounting for Stock-Based Compensation,” for a discussion of this new accounting pronouncement.

In October 2004, the American Jobs Creation Act of 2004 was signed into law. This act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria are met. In addition, on December 21, 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. The Company expects to complete its assessment on its plans for reinvestment and the associated effect of the one-time deduction by the end of fiscal year 2005. The Company estimates that under these provisions it could repatriate up to $500 million, with an associated tax cost of approximately 5.25% of any amount repatriated.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Company’s second quarter of fiscal year 2006. The Company does not believe that the adoption of SFAS No. 153 will have a material effect on the Company’s consolidated financial statements.

22

Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains certain forward-looking information relating to Computer Associates International, Inc. that is based on the beliefs of and assumptions made by our management as well as information currently available to management. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify forward-looking information. Such information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described below in the section “Risk Factors” and in our Form 10-K filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Report as anticipated, believed, estimated, or expected. We do not intend to update these forward-looking statements except as may be required by law.

QUARTERLY UPDATE

	•	In September 2004, we announced a restructuring plan to more closely align our resources with strategic growth opportunities. The original estimate of the plan included a workforce reduction of approximately five percent or 800 positions worldwide, a cost of approximately $40 million, and anticipated annual savings of approximately $70 million once the reductions were fully implemented. As of December 31, 2004, primarily all of the reductions have taken place. We have updated the estimated cost of the plan associated with the workforce reduction to be approximately $35 million and as of the third quarter of fiscal year 2005, $28 million of this cost has been expensed. As of December 31, 2004, we have paid approximately $20 million under the restructuring plan. We anticipate consolidating certain facilities as a result of the restructuring and may incur additional costs in the fourth quarter of fiscal year 2005.
	•	In November 2004, we completed a private placement of $500 million aggregate principal amount of 4.75%, 5-year senior unsecured notes and $500 million aggregate principal amount of 5.625%, 10-year senior unsecured notes (2005 Senior Notes). Refer to Note N, “Senior Debt Offering and 2004 Credit Facility,” of the Notes to the Consolidated Condensed Financial Statements and “Liquidity and Capital Resources” section of this Management’s Discussion and Analysis (MD&A) for additional information.
	•	In November 2004, John Swainson was named President and CEO-elect of the Company and was elected to the Company’s Board of Directors. Mr. Swainson was named CEO in February 2005.
	•	In November 2004, we completed the acquisition of Netegrity, Inc. (Netegrity) a leading provider of security software solutions in the area of access and identity management, in a transaction valued at approximately $453 million. Refer to Note J, “Acquisitions,” of the Notes to the Consolidated Condensed Financial Statements for additional information.
	•	In December 2004, we entered into a new, four-year $1 billion unsecured revolving credit facility. The new credit facility expires in December 2008 and replaces the $470 million unsecured revolving credit facility, which was undrawn and set to expire in January 2005. No amount is currently drawn under the new facility. Refer to Note N, “Senior Debt Offering and 2004 Credit Facility,” of the Notes to the Consolidated Condensed Financial Statements and “Liquidity and Capital Resources” section of this MD&A for additional information.
	•	In December 2004, we issued all remaining shares of common stock in connection with our settlement of the Class Action Litigation. Refer to Part II, Item I, “Legal Proceedings” for additional information.
	•	In February 2005, Robert W. Davis was named Executive Vice President and CFO of the Company effective March 1, 2005.

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

PERFORMANCE INDICATORS

Management uses several quantitative performance indicators to assess our financial results and condition. Each provides a measurement of the performance of our Business Model and how well we are executing our plan.

Our subscription-based Business Model is unique among our competitors in the software industry, and it may therefore be difficult to compare our results for many of our performance indicators with those of our competitors. The following is a summary of the principal quantitative performance indicators that management uses to review performance:

Analyses of our performance indicators, including general trends, can be found in the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A. The performance indicators discussed below are those that we believe are unique in our industry because of our subscription-based Business Model.

Subscription Revenue — Subscription revenue is the ratable revenue recognized in a period from amounts previously recorded as deferred subscription revenue. If the weighted average life of our license agreements remains constant, an increase in deferred subscription revenue will result in an increase in subscription revenue. Since we expect an increase in deferred subscription revenue for the remainder of fiscal year 2005, we also expect subscription revenue to continue to increase for that period.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

New Deferred Subscription Revenue — Since introducing the Business Model in October 2000, new deferred subscription revenue has represented the total undiscounted incremental value (contract value) of subscription software licenses sold in the current period. In the second quarter of fiscal year 2005, we began offering more flexible license terms to our channel partners, necessitating ratable recognition of revenue for the majority of our indirect business. Prior to July 1, 2004, such channel license revenue had been recorded on a sell-through basis and reported on the “Software fees and other” line item on the Consolidated Condensed Statements of Operations. New deferred subscription revenue excludes the value associated with maintenance-only license agreements, license-only indirect sales, and professional services arrangements. New deferred subscription revenue is what we expect to collect over time from our customers. This amount is recognized as subscription revenue ratably over the applicable software license term. The license agreements that contribute to new deferred subscription revenue represent binding payment commitments by customers over periods generally up to three years. New deferred subscription revenue is sometimes referred to as “bookings” and is used by management as a gauge of the level of business activity in a particular quarter. Our bookings typically increase in each consecutive fiscal quarter, with the fourth quarter being the strongest.

The contribution to current period revenue from new deferred subscription revenue from any single license agreement is relatively small, since revenue is recognized ratably over the applicable license agreement term. This diminishes the importance of having to complete transactions prior to the end of a particular quarter and allows us to enter into agreements on more favorable terms to the Company.

Weighted Average License Agreement Duration in Years — The weighted average license agreement duration in years reflects the duration of all software licenses executed during a period, weighted to reflect the contract value of each individual software license.

RESULTS OF OPERATIONS

The following table presents the percentage of total revenue and the percentage of period-over-period dollar change for the revenue line items on our Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended December 31, 2004 and 2003. These comparisons of financial results are not necessarily indicative of future results.

25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Revenue:

Total Revenue

Total revenue for the quarter ended December 31, 2004 increased $74 million, or 9% from the prior year comparable quarter, to $911 million. The increase was partially attributable to the sales of Netegrity products in the third quarter which contributed approximately $15 million of revenue to the current quarter. There was a positive impact to revenue of approximately $32 million due to fluctuations in foreign currency rates; as our international contracts are denominated in local currencies, the strengthening of both the euro and the British pound as well as certain other currencies, against the U.S. dollar positively impacted our revenue. In addition, the increase in total revenue was also partially a result of the transition to the Business Model, which contributed additional subscription revenue from the prior fiscal year period. These increases were partially offset by decreases in maintenance and financing fees resulting from how these items are accounted for under the Business Model. The recognition of maintenance and financing fees under our Business Model is described further under “Subscription Revenue” in this MD&A. Our revenues were further negatively impacted by the fact that, compared to the prior year, revenue from certain contracts in our channel business is now recognized ratably, and as a result, the majority of the revenue under these agreements is recorded as new deferred subscription revenue, which will be ratably recognized into Subscription Revenue in future periods.

Total revenue for the nine-month period ended December 31, 2004 increased $200 million, or 8%, from the prior year comparable period to $2.63 billion. Similar to the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003, the increase was partially attributable to the sales of Netegrity products in the third quarter, which contributed approximately $15 million of revenue to the current period and a positive impact to revenue of approximately $83 million due to changes in foreign currency rates. The increase in total revenue can also be attributed to the transition to the Business Model, which contributed additional subscription revenue from the prior fiscal year period, partially offset by decreases in maintenance and financing fees resulting from how these items are accounted for under the Business Model. In addition, our revenues were further negatively impacted by the fact that revenue from certain contracts in our channel business is now recognized ratably, and as a result, the majority of the revenue under these agreements is recorded as new deferred subscription revenue, which will be ratably recognized into Subscription Revenue in future periods.

Subscription Revenue

Subscription revenue for the quarter ended December 31, 2004 increased $117 million, or 23%, from the comparable prior year quarter, to $623 million. The increase was primarily due to an increase in new deferred subscription revenue from previous periods. For the quarters ended December 31, 2004 and 2003, we added new deferred subscription revenue related to our direct business of $845 million and $670 million, respectively. Licenses executed under our Business Model in the quarters ended December 31, 2004 and 2003 had weighted average durations of 2.95 and 2.90 years, respectively. Annualized deferred subscription revenue represents the total value of all new software license agreements entered into during a period divided by the weighted average duration of all such license agreements recorded during the same period. Annualized deferred subscription revenue related to our direct business increased approximately $55 million, or 24%, for the quarter ended December 31, 2004 over the comparable prior year quarter to $286 million. We recorded $53 million of new deferred subscription revenue for the quarter ended December 31, 2004 related to our indirect business. Subscription revenue was further increased as a result of how we record maintenance revenue under our Business Model as described below.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Subscription revenue for the nine months ended December 31, 2004 increased $358 million, or 25%, from the comparable prior year period to $1.78 billion. The increase for the nine-month period is attributable to the same factors as described above for the third quarter increase. Annualized deferred subscription revenue related to our direct business increased approximately $186 million, or 36%, for the nine-month period ended December 31, 2004 over the comparable prior year period to approximately $703 million. We recorded $94 million of new deferred subscription revenue for the nine-month period ended December 31, 2004 related to our indirect business.

Under the prior business model, maintenance revenue was separately identified and was reported on the “Maintenance” line item on the Consolidated Condensed Statements of Operations. Under our Business Model, maintenance that is bundled with product sales and not separately identified in our customers’ license agreements is included on the “Subscription revenue” line item on the Consolidated Condensed Statements of Operations. Under the prior business model, finance revenue was separately identified on the Consolidated Condensed Statements of Operations. Under our Business Model, financing fees are no longer applicable and the entire contract value is recognized as subscription revenue over the term of the contract. The quantification of the impact that each of these factors had on the increase in subscription revenue is not determinable.

Software Fees and Other

Software fees and other revenue primarily consist of royalties and revenue related to distribution and original equipment manufacturer (OEM) partners that has been recorded on a sell-through basis. Revenue related to distribution partners and OEMs is sometimes referred to as “indirect” or “channel” revenue. Software fees and other revenue for the third quarter of fiscal year 2005 decreased $9 million, or 11%, from the comparable prior year quarter to $75 million. Software fees and other revenue for the quarter ended December 31, 2004 includes approximately $12 million of license revenue associated with the sale of Netegrity products. In the second quarter of fiscal year 2005, we began offering more flexible license terms to our channel partners, which necessitates the deferral of revenue for the majority of our channel business. The ratable recognition of this deferred revenue is reflected on the “Subscription revenue” line item on the Consolidated Condensed Statements of Operations. The Company experienced a 17% increase in the dollar amount of indirect license contract bookings in the third quarter of fiscal year 2005 as compared with the third quarter of the prior fiscal year. The increase in bookings resulted in $53 million in new deferred subscription revenue related to the channel business that will be deferred and recognized ratably as “Subscription revenue” over the term of the applicable software license. In addition, $10 million of indirect maintenance was deferred, which will be amortized into revenue over the term of the arrangement on the “Maintenance” line item on the Consolidated Condensed Statements of Operations.

Software fees and other for the nine months ended December 31, 2004 decreased $22 million, or 10%, from the comparable prior year period to $204 million. The decrease is attributable to the same factors as described above for the third quarter decrease. The Company experienced a 22% increase in the dollar amount of indirect license contract bookings in the nine-month period ended December 31, 2004 versus the comparable prior fiscal year period. The increase in bookings resulted in $94 million in new deferred subscription revenue related to the channel business that will be deferred and recognized ratably as “Subscription revenue” over the term of the applicable software license. In addition, $42 million of indirect maintenance was deferred, which will be amortized into revenue over the term of the arrangement on the “Maintenance” line item on the Consolidated Condensed Statements of Operations. The decrease in software fees and other was partially offset by approximately $12 million of license revenue associated with the sale of Netegrity products, an approximate $10 million benefit associated with the resolution of a prior business model contract dispute in the second quarter of fiscal year 2005 and a one-time revenue adjustment of approximately $13 million in the first quarter of fiscal year 2005. The revenue adjustment related to revenue recognized from certain prior business model contracts, which had reduced revenue in prior periods.

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Maintenance

As expected, maintenance revenue for the quarter ended December 31, 2004 decreased $19 million, or 13%, to $126 million from the comparable prior year quarter. This decrease in maintenance revenue reflects the transition to, and increased number of license agreements under, our Business Model where maintenance revenue, bundled along with license revenue, is reported on the “Subscription revenue” line item on the Consolidated Condensed Statements of Operations. The combined maintenance and license revenue on these types of license agreements is recognized on a monthly basis ratably over the term of the agreement. The decrease was partially offset by new maintenance revenue earned from customers who elected optional maintenance at the expiration of their non-term-based license agreements. The quantification of the impact that each of these factors has on the decrease in maintenance revenue is not determinable. Maintenance revenue from our indirect business for the three months ended December 31, 2004 increased $9 million from the comparable prior year period to $15 million.

Maintenance revenue for the nine months ended December 31, 2004 decreased $79 million, or 17%, from the comparable prior year period to $376 million. The decrease for the nine-month period is attributable to the same factors as described above for the third quarter decrease. Maintenance revenue from our indirect business for the nine months ended December 31, 2004 increased $30 million from the comparable prior year period to $44 million.

Financing Fees

Financing fees result from the initial discounting to present value of product sales with extended payment terms under the prior business model, which required up-front recognition of revenue. This discount initially reduced the related installment accounts receivable and was referred to as “Unamortized discounts.” The related unamortized discount is amortized over the life of the applicable license agreement and is reported as financing fees. Under our Business Model, additional unamortized discounts are no longer recorded, since we no longer recognize revenue on an up-front basis for sales of products with extended payment terms. As expected, for the quarter ended December 31, 2004, these fees decreased $20 million, or 47%, from the comparable prior year quarter to $23 million. The decrease is attributable to the discontinuance of license agreements offered under the prior business model, and financing fee revenue is expected to decline to zero over the next several years.

Financing fees for the nine months ended December 31, 2004 decreased $62 million, or 42%, from the comparable prior year period to $84 million. The decrease for the nine-month period is attributable to the same factors as described above for the third quarter decrease.

Professional Services

Professional services revenue for the quarter ended December 31, 2004 increased $5 million, or 8%, from the prior year comparable quarter to $64 million. The increase was primarily attributable to growth in security engagements, which utilize Access Control and Identity Management solutions as well as growth in IT Service and Asset Management solutions. These increases were partially offset by an increase in services sold in combination with related software products, which requires that such services revenue be recognized ratably over the life of the related software contract period.

Professional services revenue for the nine months ended December 31, 2004 increased $5 million, or 3%, from the prior year period to $178 million. Similar to the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003, the increase was primarily attributable to an increase in services engagements as described above, partially offset by an increase in services sold in combination with related software products, which requires that such services revenue be recognized ratably over the life of the related software contract period.

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Total Revenue by Geography

The following table presents the amount of revenue earned from the North American and international geographic regions and corresponding percentage changes for the three-month and nine-month periods ended December 31, 2004 and 2003. These comparisons of financial results are not necessarily indicative of future results.

The increase in international revenue in the three-month and nine-month periods ended December 31, 2004 over the prior fiscal year comparable periods was attributable to increased contract bookings in prior periods associated with our European business. The increase in international revenue was also partially attributable to a positive impact to revenue from fluctuations in foreign currency exchange rates of approximately $32 million and $83 million for the three-month and nine-month periods ended December 31, 2004, respectively. The increase in foreign currency exchange in both periods is primarily associated with the strengthening of both the euro and the British pound versus the U.S. dollar.

Changes in product and services prices did not have a material impact on the three-month and nine-month periods ended December 31, 2004 or on the comparable prior fiscal year periods.

Expenses:

The following table presents expenses as a percentage of total revenue and the percentage of period-over-period dollar change for the line items on our Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended December 31, 2004 and 2003. These comparisons of financial results are not necessarily indicative of future results.

29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Amortization of Capitalized Software Costs

Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs are related to new products and significant enhancements to existing software products that have reached technological feasibility. Amortization of capitalized software costs for the quarter ended December 31, 2004 decreased $4 million, or 3%, from the comparable prior year quarter to $112 million. This decrease was due primarily to the fact that certain purchased software assets have been fully amortized.

Amortization of capitalized software costs for the nine months ended December 31, 2004 decreased $14 million, or 4%, from the comparable prior year period to $335 million. This decrease was due primarily to the fact that certain purchased software assets have been fully amortized.

Cost of Professional Services

Cost of professional services consists primarily of the personnel related costs associated with providing professional services and training to customers. Cost of professional services for the quarter ended December 31, 2004 increased $3 million, or 6%, from the comparable prior year quarter to $57 million. Cost of professional services for the quarters ended December 31, 2004 and 2003 included $1 million and less than $1 million, respectively, of stock-based compensation expense associated with the Company’s adoption of the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 under the prospective method on April 1, 2003.

The improvement in professional services gross margin is attributable to a more effective utilization of professional staff associated with slightly reduced headcount and increased professional services revenue.

Cost of professional services for the nine months ended December 31, 2004 increased $5 million, or 3%, from the comparable prior year period to $166 million. Cost of professional services for the nine-month period ended December 31, 2004 and 2003 included approximately $2 million and less than $1 million, respectively, of stock-based compensation expense associated with the Company’s adoption of the fair value recognition provisions of SFAS No. 123.

Selling, General and Administrative (SG&A)

SG&A expenses for the quarter ended December 31, 2004 increased $39 million, or 13%, from the comparable prior year quarter, to $345 million. The increase was primarily attributable to an increase in personnel related costs, including approximately $9 million of cash and stock-based compensation expense associated with the appointment of our new President and CEO in November 2004. We also incurred an increase of approximately $6 million in stock-based compensation expense principally related to the Company’s adoption of the fair value recognition provisions of SFAS No. 123. SG&A for the quarters ended December 31, 2004 and 2003 included approximately $5 million and $11 million, respectively, of legal costs related to the government investigation.

SG&A expenses for the nine-month period ended December 31, 2004 increased $45 million, or 5%, compared to the prior fiscal year period to $989 million. The increase was primarily attributable to an increase in personnel related costs, including an increase of approximately $18 million in stock-based compensation expense principally related to the Company’s adoption of SFAS No. 123 as noted above as well as approximately $9 million of cash and stock-based compensation expense associated with the appointment of our new President and CEO. The nine-month period ended December 31, 2003 included a $15 million expense for severance and other termination benefits in connection with the reorganization of the U.S. channel sales organization and the creation of CA Technology Services in April 2003. As a result of the reorganization of the U.S. channel sales organization and the creation of CA Technology Services, we eliminated approximately 450 positions worldwide during the quarter ended June 30, 2003. Each of these actions enabled us to achieve efficiencies associated with certain redundant functions that resulted in the elimination of certain positions. The estimated annual cost savings of these actions was approximately $50

30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

million. SG&A for the nine-month periods ended December 31, 2004 and 2003 included approximately $14 million and $16 million, respectively, of legal expenses related to the government investigation.

Product Development and Enhancements

For the quarter ended December 31, 2004, product development and enhancement expenditures, also referred to as research and development, increased $1 million, or 1%, from the comparable prior year quarter, to $168 million. For the quarters ended December 31, 2004 and 2003, product development and enhancement expenditures represented approximately 18% and 20% of total revenue, respectively. Product development and enhancements for the quarters ended December 31, 2004 and 2003 included approximately $4 million and $1 million, respectively, of stock-based compensation expense associated with the Company’s adoption of the fair value recognition provisions of SFAS No. 123. We continue to focus on and invest in product development and enhancements for emerging technologies such as wireless, Web services and on-demand computing, as well as a broadening of our enterprise product offerings.

Product development and enhancement expenditures for the nine-month period ended December 31, 2004, increased $20 million, or 4%, from the comparable prior year period to $514 million. For each of the nine-month periods ended December 31, 2004 and 2003, product development and enhancement expenditures represented approximately 20% of total revenue. Product development and enhancements for the nine-month period ended December 31, 2004 and 2003 included approximately $12 million and $3 million, respectively, of stock-based compensation expense associated with the Company’s adoption of the fair value recognition provisions of SFAS No. 123.

Commissions and Royalties

Commissions and royalties for the third quarter of fiscal year 2005 increased $16 million, or 21%, from the comparable prior year quarter, to $91 million. This increase was primarily due to the increase in new deferred subscription revenue recorded in the third quarter of fiscal year 2005 over the amount recorded in the third quarter of the prior fiscal year. Commissions are expensed in the period earned by employees, which is typically in the period we record the related new deferred subscription revenue.

Commissions and royalties for the nine months ended December 31, 2004 increased $44 million, or 24%, from the comparable prior year period to $226 million. The increase for the nine-month period was attributable to the same factors as described above for the third quarter increase.

Other Losses, Net

Other losses, net for the quarter ended December 31, 2004 decreased $16 million, or 73%, from the prior year third quarter to $6 million. This decrease was principally attributable to a reduction in expenses related to foreign currency exchange rate fluctuations.

Other losses, net for the nine months ended December 31, 2004 decreased $37 million, or 80%, from the prior year period to $9 million. This decrease was attributable to a $29 million reduction in expenses related to foreign currency exchange rate fluctuations and a $26 million reduction in costs related to legal proceedings. The decrease in other losses, net was reduced by an $18 million net gain on the sale of fixed assets in the prior fiscal year nine-month period.

Restructuring Charge

We recorded a charge of approximately $28 million in the second quarter of fiscal year 2005 for severance and other termination benefits in connection with our restructuring plan. The restructuring plan is designed to more closely align our investments with strategic growth opportunities and includes a workforce reduction of approximately five percent or 800 positions worldwide. The plan is expected to yield about $70 million in savings on an annualized basis, once the reductions are fully implemented. As of December 31, 2004, we have paid approximately $20 million under the restructuring plan. We anticipate consolidating certain facilities as a result of the restructuring and may incur additional costs in the fourth quarter of fiscal year 2005.

31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Shareholder Litigation and Government Investigation Settlements

All remaining shareholder litigation settlement shares were issued in December 2004. The final shareholder litigation settlement value of approximately $174 million was calculated using the New York Stock Exchange (NYSE) closing price of our common stock on December 14, 2004, the date the settlement shares were issued, and also includes certain administrative costs associated with the settlement. An initial estimate for the value of the shareholder litigation settlement was established on August 22, 2003. The chart below summarizes the NYSE closing price of our common stock and the estimated value of the shareholder litigation settlement since the initial estimate was established.

The shareholder litigation settlement expense in the third quarter of fiscal year 2005 of $18 million was a result of the increase in our stock price since September 30, 2004. The aggregate shareholder litigation settlement expense recorded since the settlement was $174 million, including $158 million in fiscal year 2004. Refer to Part II, Item 1, “Legal Proceedings” of this Form 10-Q for additional information.

In September 2004, we reached agreements with the United States Attorney’s Office for the Eastern District of New York (USAO) and the U.S. Securities and Exchange Commission (SEC) in connection with improper recognition of revenue and related reporting practices during the period January 1, 1998 through September 30, 2000, and the actions of former employees to impede the investigation. Under the related deferred prosecution agreement, we agreed, among other things, to establish a restitution fund of $225 million to compensate present and former Company shareholders for losses caused by the misconduct of certain former Company executives. In connection with the deferred prosecution agreement, we recognized $10 million in the fourth quarter of fiscal year 2004 and $218 million in the second quarter of fiscal year 2005 associated with the establishment of the shareholder restitution fund and related administrative fees. Refer to Part II, Item 1, “Legal Proceedings” for additional information.

Interest Expense, Net

Net interest expense for the third quarter of fiscal year 2005 was consistent with the prior fiscal year third quarter. Net interest expense was reduced by approximately $8 million when compared with the prior fiscal year third quarter as a result of additional interest income from an increase in our average cash balance. However, the decrease was offset by additional interest expense incurred as a result of the issuance of the 2005 Senior Notes in the third quarter of fiscal year 2005. Refer to Note N, “Senior Debt Offering and 2004 Credit Facility,” of the Notes to the Consolidated Condensed Financial Statements and “Liquidity and Capital Resources” section of this MD&A for additional information on our 2005 Senior Notes .

Net interest expense for the first nine months of fiscal year 2005 decreased $10 million, or 11%, as compared to the prior fiscal year comparable period to $79 million. The decrease in net interest expense was attributable to an increase in our average cash balance during the nine-month period ended December 31, 2004 as compared with the nine-month period ended December 31, 2003, which resulted in increase in interest income of approximately $15 million, partially reduced by additional interest expense incurred as a

32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

result of the 2005 Senior Notes. Refer to Note N, “Senior Debt Offering and 2004 Credit Facility,” of the Notes to the Consolidated Condensed Financial Statements and “Liquidity and Capital Resources” section of this MD&A for additional information.

Income Taxes

The income tax expense from continuing operations for the three-month period ended December 31, 2004 includes a tax benefit of approximately $4 million resulting from the settlement of an IRS audit that was completed for the three-year period ending March 2000 and other matters from prior years.

The income tax benefit from continuing operations for the nine-month period ended December 31, 2004 includes the $4 million tax benefit described above and a $26 million tax benefit recognized in September 2004 attributable to an IRS refund received for additional tax benefits arising from foreign export sales in prior fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable securities totaled $3.33 billion at December 31, 2004, an increase of $1.08 billion from the September 30, 2004 balance of $2.25 billion. The increase was primarily the result of the issuance of the 2005 Senior Notes described below. Cash generated from continuing operating activities for the quarters ended December 31, 2004 and 2003 was $366 million and $339 million, respectively.

Cash generated from continuing operating activities for the three months ended December 31, 2004 versus the comparable prior year period was positively impacted by a decrease in taxes paid of approximately $49 million. The decrease in taxes paid during the nine-month period ended December 31, 2004 was primarily attributable to a new IRS Revenue Procedure, which grants taxpayers a limited deferral for certain receipts of advance payments to the extent such advance payments were not recognized in revenue for financial statement purposes. As further detailed in “Other Matters” below, in November 2004 we paid $75 million in connection with agreements reached with the USAO and the SEC, which reduced cash generated from continuing operating activities.

For the nine months ended December 31, 2004, cash, cash equivalents and marketable securities had a net increase of approximately $1.42 billion from March 31, 2004. Cash generated from continuing operating activities for the nine-month periods ended December 31, 2004 and 2003 was $791 million and $692 million, respectively. Cash generated from continuing operating activities for the nine months ended December 31, 2004 versus the comparable prior year period was positively impacted by a decrease in taxes paid of approximately $168 million. The decrease in taxes paid during the nine-month period ended December 31, 2004 was primarily attributable to the new IRS Revenue Procedure noted above. In addition, cash generated from continuing operating activities was impacted by a reduction in cash paid for interest of approximately $16 million. Cash generated from continuing operations activities for the nine-month period ended December 31, 2004 was negatively impacted by the $75 million we paid in connection with agreements reached with the USAO and the SEC.

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

As of December 31, 2004 and March 31, 2004, our debt arrangements consisted of the following: