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

Form 10-K

(Mark One)

For the fiscal year ended January 31, 2003

or

For the transition period from                              to                             

Commission File Number: 0-12771

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

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

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

None

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

Item 1. Business

The Company

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

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

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

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

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

        Groups in the Regulated segment provide technical services and products through contractual arrangements as either a prime contractor or a subcontractor to other contractors, primarily for departments and agencies of the U.S. Government, including the Department of Agriculture, Department of Commerce, Department of Defense, Department of Energy, Department of Health and Human Services, Department of Homeland Security, Department of Justice, Department of Transportation, Department of Treasury, Department of Veterans Affairs, Environmental Protection Agency and National Aeronautics and Space Administration. Operations in the Regulated segment are subject to specific regulatory accounting and contracting guidelines such as Cost Accounting Standards and Federal Acquisition Regulations. The Regulated segment includes business from all of our vertical market areas. The percentage of our revenues attributable to the Regulated segment for fiscal years 2003, 2002 and 2001 were 74%, 68% and 65%, respectively.

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

        Groups in the Non-Regulated Telecommunications segment are primarily involved in the telecommunications business area. For fiscal years 2003, 2002 and 2001, our Telcordia subsidiary made up the Non-Regulated Telecommunications segment. The percentage of our revenues attributable to

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the Non-Regulated Telecommunications segment for fiscal years 2003, 2002 and 2001 were 18%, 25% and 29%, respectively.

        The Non-Regulated Other segment includes business from all of our vertical market areas except for National Security and Space (which is part of the "Other" vertical market). The percentage of our revenues attributable to the Non-Regulated Other segment for fiscal years 2003, 2002 and 2001 were 8%, 8% and 7%, respectively. For certain other financial information regarding our reportable segments and geographic areas, see Note B of the notes to consolidated financial statements on page F-13 of this Form 10-K.

        We hold and manage substantially all of our equity investment interests in publicly traded and private emerging technology companies in our wholly-owned subsidiaries, SAIC Venture Capital Corporation and Telcordia Venture Capital Corporation. In February 2000, SAIC Venture Capital Corporation sold shares of Network Solutions, Inc., which we call "NSI," in a secondary public offering, reducing its ownership interest in NSI from 44.7% to 22.6%. NSI provided Internet domain name registration services and Intranet consulting and network design and implementation services. In June 2000, NSI merged and became a wholly-owned subsidiary of VeriSign, Inc., a publicly traded company and leading provider of Internet trust services, which we call "VeriSign." On the effective date of the merger, we held approximately 9% of VeriSign's outstanding shares. We have subsequently sold all of our shares of VeriSign and liquidated the equity collar that hedged some of this investment. We no longer hold equity collars or an investment in VeriSign as a result of these transactions.

        We hold 60% of the common stock of a joint venture, Informática, Negocios y Tecnología, S.A., which we call "INTESA." INTESA was formed in January 1997 to provide information technology services in Latin America. INTESA's principal customer and 40% stockholder is the Venezuelan national oil company, Petróleos de Venezuela, S.A., which we call "PDVSA." The basic term of INTESA's services agreement to provide information technology outsourcing services to PDVSA expired on June 30, 2002, but INTESA's services continued under the disentanglement phase of the services agreement. The parties negotiated for a possible renewal of the services agreement or purchase by PDVSA of our interest in INTESA. As of January 31, 2003 and to date, such negotiations have been unsuccessful. The political and economic environment in Venezuela remains very unstable. A general work stoppage in Venezuela has affected the petroleum sector, including PDVSA and INTESA. Due to the suspension of operations, general work force strike and our relationship with PDVSA, the operations of the joint venture are not expected to resume. Until now, we had consolidated our 60% interest in the joint venture, but INTESA is now classified as discontinued operations. We also own 55% of AMSEC LLC, a joint venture that provides maintenance engineering and technical support services to the U.S. Navy and marine industry customers.

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

Technical Services

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

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National Security

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

Health Care

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

Environment

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

Energy

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

Telecommunications

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

Information Technology

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

Other Technical Services

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

Resources

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

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

Marketing

        Our marketing activities in the Regulated, Non-Regulated Telecommunications and Non-Regulated Other segments are focused on key vertical markets and are primarily conducted by our own professional staff of engineers, scientists, analysts and other personnel. Our marketing approach for our technical services begins with the development of information concerning the requirements of our government, commercial and other potential customers for the types of technical services that we provide. This information is gathered in the course of contract performance, reviewing requests for competitive bids, formal briefings, participation in professional organizations and published literature. This information is then evaluated and exchanged among our internal marketing groups (organized along functional, geographic and other lines) in order to devise and implement, subject to management review and approval, the best means of taking advantage of available business opportunities, including the preparation of proposals responsive to the stated and perceived needs of customers. Our products may be marketed with the assistance of independent sales representatives.

Competition

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

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

Significant Customers

        During fiscal years 2003, 2002 and 2001, approximately 92%, 88% and 85%, respectively, of the revenues in the Regulated segment were attributable to prime contracts directly with a number of departments and agencies of the U.S. Government or to subcontracts with other contractors engaged in work for the U.S. Government. Revenues from the U.S. Army represent 11% of consolidated revenues in 2003. No other customer or single contract accounted for 10% or more of consolidated revenues in fiscal years 2003, 2002 and 2001.

        Telcordia historically has derived a majority of its revenues from the regional Bell operating companies, which we call "RBOCs." The percentage of the revenues in the Non-Regulated Telecommunications segment from the RBOCs was 65% in fiscal year 2003, 65% in fiscal year 2002 and 62% in fiscal year 2001. No single RBOC accounted for 10% or more of consolidated revenues in fiscal years 2003, 2002 and 2001.

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Government Contracts

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

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

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

Contract Type

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

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

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

        During fiscal years 2003, 2002 and 2001, approximately 52%, 51% and 51%, respectively, of the Regulated segment revenues were derived from cost-reimbursement contracts and approximately 15%, 16% and 15%, respectively, of the Regulated segment revenues were from firm fixed-price contracts, with the balance from time-and-materials and fixed-price level-of-effort contracts.

        During fiscal years 2003, 2002 and 2001, approximately 82%, 82% and 80%, respectively, of the Non-Regulated Telecommunications segment revenues were from firm fixed-price contracts and approximately 15%, 17% and 19%, respectively, of the Non-Regulated Telecommunications segment revenues were derived from time-and-materials and fixed-price level-of-effort contracts, with the balance from cost-reimbursement contracts.

        During fiscal years 2003, 2002 and 2001, approximately 56%, 46% and 36%, respectively, of the Non-Regulated Other segment revenues were derived from target cost and fee with risk sharing contracts and approximately 28%, 44% and 41%, respectively, of the Non-Regulated Other segment revenues were from time-and-materials and fixed-price level-of-effort contracts, with the balance from firm fixed-price and cost-reimbursement contracts.

        Any costs that we incur on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract, and for which formal contracts or contract modifications have not been executed are incurred at our risk, and it is possible that the customer will not reimburse us for these pre-contract costs. Pre-contract costs at January 31, 2003 and 2002 were $49,247,000 and $44,299,000, respectively, for the Regulated segment; $698,000 and $446,000, respectively, for the Non-Regulated Telecommunications segment; and $305,000 and $605,000, respectively, for the Non-Regulated Other segment. We expect to recover substantially all of these costs; however, no assurance can be given that the contracts or contract amendments will be executed or that we will recover the related costs.

Patents and Proprietary Information

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

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

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

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Backlog

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

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

Employees and Consultants

        As of January 31, 2003, we employed approximately 38,700 full and part time employees. We also use consultants to provide specialized technical and other services on specific projects. To date, we have not experienced any strikes or work stoppages and we consider our relations with our employees to be good.

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

Company Website and Information

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

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

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

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RISK FACTORS

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

Risks Relating to Our Business

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

        We derive a substantial portion of our revenues from the U.S. Government as a prime contractor or a subcontractor. The percentage of total revenues from the U.S. Government was 69% in fiscal year 2003, 61% in fiscal year 2002 and 56% in fiscal year 2001. In addition, revenues from the U.S. Army represent 11% of consolidated revenues in fiscal year 2003. Our revenues could be adversely impacted by a reduction in the overall level of U.S. Government spending and by changes in its spending priorities from year to year. Furthermore, even if the overall level of U.S. Government spending does increase or remains stable, the budgets of the government agencies with whom we do business may be decreased or our projects with them may not be sufficiently funded, particularly because Congress usually appropriates funds for a given project on a fiscal-year basis even though contract performance may take more than one year. The current Iraq conflict may adversely impact our revenues in fiscal year 2004 if U.S. Government funding shifts to direct war fighting efforts, as we may experience delays in new contract awards and funding of current contracts that are not directly related to the conflict. In addition, obtaining U.S. Government contracts remains a highly competitive process and this has led to a greater portion of our revenue base being associated with contracts providing for a lower amount of reimbursable cost than we have traditionally been able to recover.

        Telcordia historically has derived a majority of its revenues from the RBOCs. The percentage of total Telcordia revenues from the RBOCs was 65% in fiscal year 2003, 65% in fiscal year 2002 and 62% in fiscal year 2001. With the downturn in the telecommunications industry, Telcordia's business is more dependent on its business from the RBOCs and it continues efforts to diversify its business by obtaining new customers. As a result of the changes and continuing decline in the marketplace, Telcordia's customers, particularly the RBOCs, continue to reduce their contract spending and place pressure on Telcordia to reduce prices and accept less favorable terms on existing and future contracts. Telcordia continues to seek opportunities for growth through the introduction of new products and diversification into new markets and with new customers. A continued downturn in the telecommunications industry and loss of business from the RBOCs or other commercial customers could further reduce revenues and have an adverse impact on our business.

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

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

        The percentage of our Regulated segment revenues from firm fixed-price contracts was 15% for fiscal year 2003, 16% for fiscal year 2002 and 15% for fiscal year 2001. The percentage of our Non-Regulated Telecommunications segment revenues from firm fixed-price contracts was 82% for fiscal year 2003, 82% for fiscal year 2002 and 80% for fiscal year 2001. Because we assume the risk of performing a firm fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for such contracts.

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        Many of our customers in the information technology outsourcing business contract on the basis of target cost and fee with risk sharing. During fiscal years 2003, 2002 and 2001, approximately 56%, 46% and 36%, respectively, of the Non-Regulated Other segment revenues were derived from target cost and fee with risk sharing contracts. Under target cost and fee with risk sharing contracts, the customers reimburse our costs plus a specified or target fee or profit; however, if our actual costs exceed the target cost, our target fee and cost reimbursement are reduced by a portion of the overrun. Failure to control costs during performance of the work could result in reduced profits for such contracts.

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

        Our success to date has resulted in part from the significant contributions of our executive officers, in particular those of our founder and chief executive officer, J.R. Beyster (age 78). Dr. Beyster has been our only chief executive officer and chairman of the board since he founded the company in 1969. He also currently serves as our president. Dr. Beyster plays a key role in many aspects of our business, including marketing, operations and management. Dr. Beyster and our other executive officers are expected to continue to make important contributions to our success. The loss of our key personnel could materially affect our operations. We generally do not have long-term employment contracts with these key personnel nor do we maintain "key person" life insurance policies.

We face risks relating to Government contracts

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

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

        Our contract costs are subject to audits by Government agencies.    The costs we incur on our U.S. Government contracts, including allocated indirect costs, may be audited by U.S. Government representatives. These audits may result in adjustments to our contract costs. We normally negotiate with the U.S. Government representatives before settling on final adjustments to our contract costs. Substantially all of our indirect contract costs have been agreed upon through fiscal year 2001 and are not subject to further adjustment. We have recorded contract revenues in fiscal years 2002 and 2003 based upon costs we expect to realize upon final audit. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenues or profits upon completion and final negotiation of these audits.

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

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

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

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

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We may not be able to compete successfully for available acquisition candidates, complete future acquisitions and investments or accurately estimate their financial effect on our business

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Future acquisitions, investments and joint ventures may require us to issue additional common stock, spend significant cash amounts or decrease our operating income

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We may have trouble integrating the acquired business and retaining its personnel

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Acquisitions, investments or joint ventures may disrupt our business and distract our management from other responsibilities

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If our acquisitions or investments fail, our business could be harmed

We face risks associated with our international business

        Our international business operations are subject to a variety of the risks associated with conducting business internationally. These risks include:

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unexpected changes in regulatory requirements

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tariffs

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political and economic instability

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unfamiliar and unknown business practices and customs

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restrictive trade policies

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inconsistent product regulation

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cost of complying with a variety of laws

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licensing requirements

        We do not know the impact that such regulatory, geopolitical and other factors may have on our business in the future.

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

11

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

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

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

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

Unfavorable economic conditions could harm our business

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

Risks Relating to Our Industry

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

        The availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Because of our growth and competition for experienced personnel, particularly in highly specialized

12

areas, it has become more difficult to meet all of our needs for these employees in a timely manner. We intend to continue to devote significant resources to recruit, train and retain qualified employees; however, we cannot assure you that we will be able to attract and retain such employees on acceptable terms. Any failure to do so could have a material adverse effect on our operations.

Our failure to remain competitive could harm our business

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

Risks Relating to Our Stock

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

        There is no public market for our Class A common stock. The limited market maintained by our wholly-owned broker-dealer subsidiary, Bull, Inc., permits existing stockholders to offer our stock for sale only on predetermined trade dates and only at the price determined by the board of directors. Generally, there are four trade dates each year, however, a scheduled trade date could be postponed or cancelled. In fact, the trade originally scheduled for July 26, 2002 was postponed to August 16, 2002 in order to establish a new stock price after it was determined that the stock price set by the board of directors on July 12, 2002 no longer represented a fair market value.

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

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

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

13

the limited market during fiscal years 2003 and 2002, respectively. Such purchases may change in the future, depending on the levels of participation in and contributions to such plans and the extent to which such contributions are invested in Class A common stock.

        To the extent that purchases by the trustees of our retirement and benefit plans decrease, and purchases by us decrease or do not increase, the ability of stockholders to resell their shares in the limited market will likely be adversely affected. Although all shares of Class A common stock offered for sale were sold in the limited market on each trade date occurring during the last two fiscal years, we cannot assure you that a stockholder desiring to sell all or a portion of his or her shares of our Class A common stock on any trade date will be able to do so.

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

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

•

our right of first refusal to purchase shares a stockholder offers to sell to a third party other than in our limited market

•

our right to repurchase shares upon the termination of a stockholder's employment or affiliation with us

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

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

        Our stock price is not determined by a trading market of bargaining buyers and sellers. Our board of directors, all of whom are stockholders, determines the price at which the Class A common stock trades by using the valuation process that includes input from an independent appraiser and a stock price formula as described under "Price Range of Class A Common Stock and Class B Common Stock." The stock price remains in effect until subsequently changed. The board of directors has authorized its stock policy committee to review the stock price during the period between regularly scheduled meetings of the board of directors to determine whether the stock price continues to represent a fair market value, and if necessary, modify the price. In some quarters, the full board of directors conducts this review. If a stock price modification is necessary, the stock policy committee or board of directors would apply the same valuation process used by the board of directors. The stock policy committee modified the stock price on July 29, 2002 after it was determined that the stock price established by the board of directors on July 12, 2002 no longer represented a fair market value. All trades in the limited market will occur at the stock price determined by the board of directors or its stock policy committee. Our board of directors believes the stock price represents a fair market value; however, we cannot assure you that the stock price represents the value that would be obtained if our stock was publicly traded. The formula, which is one part of the valuation process, does not specifically include variables reflecting all financial and valuation criteria that may be relevant. In addition, our board of directors generally has broad discretion to modify the formula. Absent changes in the market factor used in the formula, which may change from quarter to quarter as appropriate to reflect changing business, financial and market conditions, and accounting and other impacts unrelated to our value, the mechanical application of the formula tends to reduce the impact of quarterly fluctuations in our operating results on the stock price because the formula takes into account our segment operating income for the four preceding quarters.

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

        We cannot assure you that the Class A common stock will provide returns in the future comparable to those achieved historically or that the price will not decline. In fact, the price declined 13.2% during fiscal year 2003.

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

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

•

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

•

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

•

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

•

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

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

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

Forward-Looking Statement Risks

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

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

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

Item 2. Properties

        As of January 31, 2003, we conducted our operations in more than 400 offices located in 42 states, the District of Columbia and various foreign countries. We occupy a total of approximately 10,300,000 square feet of space. Of this total, we own or have ownership rights in approximately 2,900,000 square feet, and the balance is leased. Our major locations are in the San Diego, California, Washington, D.C. and Piscataway, New Jersey metropolitan areas, where we occupy approximately 1,300,000 square feet, 2,600,000 square feet and 1,100,000 square feet of space, respectively.

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

•

San Diego metropolitan area

•

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

•

Washington, D.C. metropolitan area

•

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

•

In Vienna, Virginia, three buildings totaling approximately 330,000 square feet of space on 33.74 acres of land

•

In Reston, Virginia, a 62,000 square foot building on 2.6 acres of land

•

Piscataway, New Jersey metropolitan area

•

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

•

Other areas

•

In Huntsville, Alabama, a 100,000 square foot building on 18 acres of land

•

In Columbia, Maryland, a 95,500 square foot building on approximately 7.3 acres of land

•

In Virginia Beach, Virginia, two buildings totaling 159,200 square feet on approximately 22.5 acres of land

•

In Orlando, Florida, an 85,000 square foot building on 17.99 acres of land

•

In Oak Ridge, Tennessee, an 83,000 square foot building on approximately 8.4 acres of land

•

In Dayton, Ohio, two buildings totaling 79,400 square feet on 4.5 acres of land

        The nature of our business is such that there is no practicable way to relate occupied space to industry segments. We consider our facilities suitable and adequate for our present needs. See Note P of the notes to consolidated financial statements on page F-36 of this Form 10-K for information regarding commitments under leases.

Item 3. Legal Proceedings

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

16

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

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

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

        Not applicable.

Executive Officers of the Registrant

        Pursuant to General Instruction G(3) of General Instructions to Form 10-K, the following list is included as an unnumbered Item in Part I of this Form 10-K in lieu of being incorporated by reference from our definitive Proxy Statement used in connection with the solicitation of votes for our 2003 Annual Meeting of Stockholders (the "2003 Proxy Statement").

        The following is a list of the names and ages (as of March 31, 2003) of all our executive officers, indicating all positions and offices held by each such person and each such person's principal occupation or employment during at least the past five years. All such persons have been elected to serve until their successors are elected or until their earlier resignation or retirement. Except as otherwise noted, each of the persons listed below has served in his present capacity for at least the past five years.

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PART II

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

The Limited Market

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

        The limited market permits existing stockholders to offer for sale shares of Class A common stock on predetermined days which we call a "trade date." Generally, there are four trade dates each year, however, a scheduled trade date could be postponed or cancelled. In fact, the trade originally scheduled for July 26, 2002 was postponed to August 16, 2002 in order to establish a new stock price after it was determined that the stock price set by the board of directors on July 12, 2002 no longer represented a fair market value. A trade date typically occurs one week after our quarterly board of directors meetings, currently scheduled for January, April, July and October. All shares of Class B common stock to be sold in the limited market must first be converted into 20 times as many shares of Class A common stock.

        All sales and purchases are made at the prevailing price of the Class A common stock determined by the board of directors or its stock policy committee pursuant to the valuation process described below. All participants who wish to participate in a particular trade must submit a trade request in the form of a limit order. A limit order is a request to buy stock at any price equal to or below the limit price specified by the person placing the order or a request to sell stock at any price equal to or above the limit price specified. A limit order will not be processed if the limit price is not satisfied by the price established by the board of directors unless the order is modified. A participant may not submit both a buy limit order and a sell limit order on the same account for the same trade.

        Trade participants may submit their limit order requests either online or in paper format. In order to participate in a particular trade, the participant's limit order must be received by Bull, Inc. no later than 5 p.m. Pacific Time on the day before the board of directors meeting at which the price of the Class A common stock is determined which we refer to as the "limit order deadline." After the stock price has been determined, participants can cancel their orders prior to 5 p.m. Pacific Time on the Friday one week after the stock price is determined which we refer to as the "trade modification deadline." In addition, those participants who submitted their orders online may modify their orders prior to the trade modification deadline. Participants who submitted their order by paper may not modify their orders once submitted, other than to cancel their order. Participants may not change a buy order to a sell order, or a sell order to a buy order after the limit order deadline. All sellers in the limited market (other than our retirement plans and us) pay Bull, Inc. a sales commission. Stockholders submitting sales orders online pay a commission currently equal to 0.5% of the proceeds from such sales and stockholders submitting sales orders by paper pay a commission currently equal to 1% of the proceeds from such sales. No commission is paid by purchasers in the limited market.

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

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

        We are currently authorized, but not obligated, to purchase shares of Class A common stock in the limited market on any trade date, but only if and to the extent that the number of shares offered for sale by stockholders exceeds the number of shares sought to be purchased by authorized buyers, and we, in our discretion, determine to make such purchases. In deciding whether to make such purchases, we will consider a variety of factors, including our cash position and cash flows, investment and capital activities, financial performance, financial covenants, the number of shares outstanding and the amount of the under subscription in the market. The final determination is not made before the trade date. We have purchased a significant amount of Class A common stock in the limited market during recent periods. We purchased a total of 16,238,751 shares on the trade dates in fiscal year 2003 and a total of 14,028,781 shares on the trade dates in fiscal year 2002. These purchases accounted for 84.5% and 88.2%, respectively, of the total shares purchased by all buyers in the limited market during fiscal years 2003 and 2002. Our purchases balanced the number of shares offered for sale by stockholders with the number of shares sought to be purchased by authorized buyers. If the increasing trend of trade imbalances continues, we cannot assure you that we will continue to purchase such excess shares in the future. Accordingly, if the aggregate number of shares offered for sale exceeds the aggregate number of shares sought to be purchased by authorized buyers, and we elect not to participate in a trade or otherwise limit our participation in a trade, our stockholders may be unable to sell all the shares they desire to sell in the limited market. Because no other market exists for our stock, our stockholders may be unable to sell all the shares they desire to sell.

        During the 2003 and 2002 fiscal years, the trustees of certain of our retirement and benefit plans purchased an aggregate of 1,998,956 and 1,450,018 shares, respectively, in the limited market. These purchases accounted for approximately 10.4% and 9.1% of the total shares purchased by all buyers in the limited market during fiscal years 2003 and 2002, respectively. Such purchases may change in the future, depending on the levels of participation in and contributions to such plans and the extent to which such contributions are invested in Class A common stock.

        To the extent that purchases by the trustees of our retirement and benefit plans decrease, and purchases by us decrease or do not increase, the ability of stockholders to resell their shares in the limited market will likely be adversely affected. Although all shares of Class A common stock offered for sale were sold in the limited market on each trade date occurring during the last two fiscal years, we cannot assure you that a stockholder desiring to sell all or a portion of his or her shares of our Class A common stock on any trade date will be able to do so.

        To the extent that the aggregate number of shares sought to be purchased by authorized buyers exceeds the aggregate number of shares offered for sale by stockholders, we may, but are not obligated to, sell authorized but unissued shares of Class A common stock in the limited market. In making this determination, we will consider a variety of factors, including our cash position and cash flows, investment and capital activities, financial performance, financial covenants, the number of shares outstanding and the amount of the over subscription in the limited market. The final determination is not made before the trade date. In fiscal years 2003 and 2002, we did not sell any shares of Class A common stock in the limited market as the number of shares sought to be purchased by authorized buyers did not exceed the number of shares offered for sale by stockholders. To the extent that we

20

choose not to sell authorized but unissued shares of Class A common stock in the limited market, the ability of individuals to purchase shares on the limited market may be adversely affected. We cannot assure you that an individual desiring to buy shares of our Class A common stock in any future trade will be able to do so.

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

        Our board of directors determines the price of the Class A common stock using the valuation process described below. The board of directors reviews and sets the market factor in the formula, which is set forth below and used in the valuation process, at the value which causes the formula to yield the stock price that the board believes represents a fair market value for the Class A common stock. The Class A common stock is traded in the limited market maintained by Bull, Inc. at the stock price determined by the board of directors. Our board of directors reviews the stock price at least four times each year, generally at quarterly meetings. These meetings are currently scheduled in January, April, July and October of each year and are held approximately one week before the four predetermined trade dates. The board of directors has authorized its stock policy committee to review the stock price during the period between regularly scheduled meetings of the board of directors to determine whether the stock price continues to represent a fair market value, and if necessary, modify the price. In some quarters, the full board of directors conducts this review. If a stock price modification is necessary, the stock policy committee or board of directors would apply the same valuation process used by the board of directors. The stock policy committee modified the stock price on July 29, 2002 after it was determined that the stock price established by the board of directors on July 12, 2002 no longer represented a fair market value. The Class A common stock is traded in the limited market maintained by Bull, Inc. at the stock price determined by the board of directors or its stock policy committee. Our certificate of incorporation provides that the price of the Class B common stock is equal to 20 times the stock price applicable to the Class A common stock.

        The following formula is used in the valuation process:

        the price per share is equal to the sum of

        (1)  a fraction, the numerator of which is our stockholders' equity at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur, adjusted to reflect the value of publicly traded equity securities classified as investments in marketable securities, as well as the profit or loss impact, if any, on stockholders' equity arising from investment activities, non-recurring gains or losses on sales of business units, subsidiary common stock, or similar transactions closed, as of the valuation date ("E"), and the denominator of which is the number of outstanding common shares and common share equivalents at the end of such fiscal quarter ("W₁") and

        (2)  a fraction, the numerator of which is 5.66 multiplied by the market factor ("M" or "market factor"), multiplied by our operating income for the four fiscal quarters immediately preceding the price determination, net of taxes, excluding investment activities, losses on impaired intangible assets, non-recurring gains or losses on sales of business units, subsidiary common stock and similar items, and including equity in the income or loss of unconsolidated affiliates and the minority interest in income or loss of consolidated subsidiaries ("P"), and the denominator of which is the weighted average number of outstanding common shares and common share equivalents for those four fiscal quarters, as used by us in computing diluted earnings per share ("W").

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

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

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

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

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

•

a change in the formula or any other aspect of the valuation process used to value the Class A common stock is required under applicable law, or



•

in the good faith exercise of its fiduciary duties and after consultation with our independent accountants as to whether the change would result in a charge to earnings upon the sale of Class A common stock, the board of directors, including a majority of the directors who are not our employees, determines that the valuation process no longer results in a fair market value for the Class A common stock, or



•

in the good faith exercise of its fiduciary duties, the board of directors, including a majority of directors who are not our employees, after consulting with an independent appraisal firm, determines that a change in the formula or any other aspect of the valuation process is appropriate and that the stock price established by the board of directors through the modified valuation process reflects a fair market value of the Class A common stock.

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

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the performance of the general securities markets and relevant industry groups



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our historical financial performance versus comparable public companies



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the prospects for our future performance



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the value of our investments



•

general economic conditions



•

valuation input from HLHZ

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

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        In conjunction with the board of directors' valuation process, HLHZ prepares an appraisal of the Class A common stock. The stock price and market factor, as determined by the board of directors, remain in effect until subsequently changed by the board of directors or its stock policy committee. The board of directors believes that the current valuation process results in a value which represents a fair market value for the Class A common stock within a broad range of financial criteria.

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

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



•

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



•

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



•

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

Stock Price Tables

        The following tables set forth information concerning the stock price for the Class A common stock, the applicable price for the Class B common stock and each of the variables contained in the formula, including the market factor, in effect for the periods beginning on the dates indicated. As indicated above, the definitions of "E" or adjusted stockholders' equity and "P" or adjusted earnings in the formula were modified effective as of the July 2001 valuation. The data in the following table is based on the modified definitions but the data in the April 2001 trade table is based on the definitions of the formula then in effect. The Class A common stock has been rounded to the nearest penny. There can be no assurance that the Class A common stock or the Class B common stock will in the future provide returns comparable to historical returns or that the price will not decline. In fact, the price declined 13.2% during fiscal year 2003. See "Business—Risk Factors—Future returns on our common stock may be significantly lower than historical returns."