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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-12771

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-3630868
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
10260 CAMPUS POINT DRIVE, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 546-6000

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 [X] No [ ]

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. [ ]

As of March 31, 1998, the aggregate market value of the voting stock held
by non-affiliates of Registrant was $1,050,466,293. For the purpose of this
calculation, it is assumed that the Registrant's affiliates include the
Registrant's Board of Directors and certain of the employee benefit plans of the
Registrant and its subsidiaries. The Registrant disclaims the existence of any
control relationship between it and such employee benefit plans.

As of March 31, 1998, there were 52,612,683 shares of Registrant's Class A
Common Stock and 314,173 shares of Registrant's Class B Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive Proxy Statement for the Company's 1998
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K Report.
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2

PART I

ITEM 1. BUSINESS

THE COMPANY

Science Applications International Corporation (the "Company") provides
diversified professional and technical services ("Technical Services") and
designs, develops and manufactures high-technology products ("Products"). The
Company's Technical Services and Products have been primarily sold to
departments and agencies of the U.S. Government, including the Department of
Defense ("DOD"), Department of Energy ("DOE"), Department of Transportation,
Department of Veterans Affairs ("VA"), Environmental Protection Agency and
National Aeronautics and Space Administration ("NASA"). Revenues generated from
the sale of Technical Services and Products to the U.S. Government as a prime
contractor or subcontractor accounted for approximately 66%, 79% and 83% of
revenues in fiscal years 1998, 1997 and 1996, respectively. The balance of the
Company's revenues were attributable to the sales of Technical Services and
Products to foreign, state and local governments, commercial customers and
others. On November 14, 1997, the Company completed its acquisition (the
"Bellcore Acquisition") of all of the outstanding common stock of Bell
Communications Research, Inc., a Delaware corporation ("Bellcore"), from the
Regional Bell Operating Companies (the "RBOCs"). Upon completion of the Bellcore
Acquisition, Bellcore became a wholly-owned subsidiary of SAIC. Bellcore is a
global provider of software, engineering and consulting services, advanced
research and development, technical training and other services to the
telecommunications industry. With the completion of the Bellcore Acquisition,
the Company's revenues attributable to the sales of Technical Services and
Products to commercial customers are expected to increase substantially as a
percentage of revenues.

The percentage of revenues attributable to Technical Services has increased
since fiscal year 1996 while Products revenues have correspondingly decreased.
Technical Services revenues and Products revenues were 98% and 2% of total
revenues, respectively, for fiscal year 1998; 94% and 6% of total revenues,
respectively, for fiscal year 1997; and 94% and 6% of total revenues,
respectively, for fiscal year 1996. In 1998, the Company sold a business unit
which manufactured data display devices and "ruggedized" personal computers and
which accounted for 49% of the Products revenue in 1997. The Company provides
Technical Services primarily in the areas of "National Security," "Health,"
"Environment," "Energy," "Telecommunications," "Commercial Information
Technology" and "Other Technical Services," the last of which includes the
Company's transportation and space business areas. The percentage of Technical
Services revenues attributable to National Security-related work has gradually
declined to 37% of total revenues for fiscal year 1998. For fiscal year 1998,
the Health, Environment, Energy, Telecommunications, Commercial Information
Technology and Other Technical Services business areas accounted for 12%, 9%,
4%, 8%, 14% and 14%, respectively, of total revenues. For certain financial
information regarding the Company's Technical Services and Products segments,
see Note C of Notes to Consolidated Financial Statements of the Company set
forth on page F-13 of this Form 10-K.

In October 1997, the Company's ownership of the common stock of Network
Solutions, Inc., a Delaware corporation ("NSI"), was reduced from 100% to
approximately 76% as a result of NSI's initial public offering. Such ownership
interest represents approximately 97% of the combined voting power of the
outstanding common stock of NSI. NSI provides Internet domain name registration
services and Intranet consulting and network design and implementation services.

The Company has a 60% interest in a joint venture, Informatica, Negocio y
Tecnologia, S.A. ("INTESA"), which was formed with Venezuela's national oil
company, Petroleos de Venezuela, S.A. INTESA provides information technology
services in Latin America.

The Company was originally incorporated as a California corporation in 1969
and was re-incorporated as a Delaware corporation in 1984. The principal office
and corporate headquarters of the Company are located in San Diego, California
at 10260 Campus Point Drive, San Diego, California 92121 and its telephone
number is (619) 546-6000. All references to the Company include, unless the
context indicates otherwise, the Company and its predecessor and subsidiary
corporations.

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TECHNICAL SERVICES

National Security

The Company currently provides a wide array of national security-related
Technical Services to its customers, including advanced research and technology
development, systems engineering and systems integration and technical,
operational and management support services. Examples of the Company's Technical
Services in the national security area include the following:

O Development and integration of command, control and intelligence
applications software, middleware and data bases in client-server
architectures to provide situational awareness and decision-aiding to
military commanders and organizations; the range of services includes
architectural definition, systems and software engineering, systems
installation, training and site support.

O Information and telecommunication system engineering and support
services, including requirements analysis and acquisition support,
computer system design, information and user environment modeling and
data communication systems support.

O Defense studies and analyses for various defense and intelligence
agencies of the U.S. Government, including studies regarding conventional
and nuclear warfare issues, treaty negotiation and verification, and the
integration of military operational and technological considerations with
defense policy issues.

O Development of core technology for advanced distributed simulation and
applications for the DOD and other government and commercial customers.

O Support of numerous DOD test and evaluation requirements of ground, air,
sea and space systems; assistance to the U.S. Air Force, U.S. Navy, U.S.
Army, U.S. Marine Corps and the Office of the Secretary of Defense in
assessing the military effectiveness and suitability of major
communication, sensor, navigation, weapon and related systems that
support primary service and/or joint service roles and missions.

O Logistics engineering services and turnkey logistics information
management systems for a wide variety of government customers.

O Design, integration, implementation and operation of battlefield
simulation training ranges on land, air and sea.

O Systems engineering and technical assistance for cruise missiles,
unmanned aerial vehicles, future aircraft and ballistic missile concepts;
systems analysis of sensors for the detection and tracking of aircraft
and ballistic missiles; and studies regarding the survivability of
tactical aircraft and strategic missiles.

O Support to the DOD in imagery collection, processing, exploitation and
dissemination systems for digital processing, technology intelligence
communications and information management.

O Maintenance engineering and training, including field technical services
and repair, electronic system design and hands-on operational support,
primarily to the U.S. Navy.

O Independent verification and validation and software quality assurance
support services for shipboard combat systems, mission planning
functions, operational flight software command and control processors,
nuclear surety systems, soft copy imagery processing, data storage and
dissemination systems and various submarine, surface ship and command,
control and communications systems.

O Engineering, environmental, quality assurance, integration and program
support to the U.S. Army's chemical demilitarization and remediation
activity.

O System engineering, development, integration and related services for the
intelligence community.

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Health

The Company provides health-related Technical Services to government and
commercial customers, including medical information systems, technology
development and research support services. Examples of the Company's Technical
Services in the health area include the following:

O Applied research, systems integration and customer support services to
both commercial and federal health care clients, including research
initiatives for the U.S. Advanced Research Projects Agency, developing
and operating a nationwide health care frame relay-based
telecommunications system for the VA and automating the information
systems for the DOD's medical treatment facilities worldwide.

O Information engineering, software development and program support for the
Department of Health and Human Services and the National Institutes of
Health.

O Design, development and operation of health information networks for
integrated healthcare delivery systems for commercial healthcare clients.

O Research support services to the National Cancer Institute-Frederick
Cancer Research and Development Center, including management and
operations support, quality and safety operations, ongoing research and
research support tasks.

O Support to the U.S. Army in the biomedical area, including providing
expert analysis, research planning, program design and review and topical
research on a variety of military medical issues, including medical
countermeasures to chemical and biological warfare, casualty care and
battlefield hazards, as well as biomedical service and management of
government facilities.

O Preclinical product development services for the pharmaceutical,
biotechnology and medical device community, including veterinary
pathology, Food and Drug Administration requirements analysis, quality
assurance and Good Laboratory Practices consulting, special toxicological
assay development and performance, client site services, and the
development and management of complete product development programs
(virtual product development).

Environment

In the environmental area, the Company performs site assessments, remedial
investigations and feasibility studies, remedial actions, technology
evaluations, sampling, monitoring and regulatory compliance support and
training. Examples of the Company's Technical Services in the environmental area
include the following:

O Management and technical support to the DOE for the characterization of
the nation's first potential high-level waste repository, including the
preparation and coordination of environmental assessments, field testing,
technical evaluations, public information, quality assurance, information
systems and training.

O Solid and hazardous waste services to federal, state and local
governments and the private sector, including environmental assessments,
environmental impact statements, design engineering, remedial
investigations and feasibility studies, remedial actions, regulatory and
enforcement support, pollution prevention and engineering services.

O Analysis of a broad range of environmental issues associated with the
marine sciences such as ocean dumping, mineral exploration, global
change, global ocean circulation and temperature trends.

O Support associated with the development of treatment technologies,
including treatability studies, development of protocols for technology
evaluation, pollution prevention assessments, waste minimization and
technology assessments.

O Development and implementation of information systems.

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Energy

The energy-related Technical Services of the Company include safety
evaluations, security, reliability and availability engineering evaluations,
technical reviews, quality assurance, information systems, plant monitoring
systems and project management. Examples of the Company's Technical Services in
the energy area include the following:

O Engineering and support services to nuclear, electric, gas and other
utility operations in the areas of computer systems, information
processing, configuration management, risk assessment, safety analysis,
nuclear engineering, reliability and availability evaluations, simulator
upgrades, energy policy analysis and alternative energy evaluation.

O Support to DOE in planning, facility transitions, safety analysis,
transportation, waste management, quality assurance, emergency
preparedness and public outreach.

O Design, fabrication and application of alternative energy sources such as
solar generators and fuel cells.

O Information systems services to the DOE, including collection, analysis
and storage of energy information, the development of geographic
information systems and the overall management of large computer
facilities.

O Support to DOE in fusion energy research, including facility management,
computer system development and project management support in connection
with an international thermonuclear experimental reactor.

O Systems integration services to the utility industry, including design,
development and installation of plant process computer systems,
supervisory control and data acquisition (SCADA) systems and electronic
security systems.

O Management, operation and technical services for fossil energy research
laboratories.

Telecommunications

Examples of the Company's Technical Services in the telecommunications area
include the following:

O Design and implementation of interoperable communications networking
solutions to enable customers to plan, build, activate and service their
networks.

O New software products for the telecommunications industry and the
maintenance and enhancement of existing software systems, customization
of software and licensing of technology.

O Consulting and engineering services for telecommunications providers,
including the design and implementation of operating solutions for
customers' telecommunications needs.

O Research and development for the telecommunications industry.

Commercial Information Technology

Examples of the Company's Technical Services in the commercial information
technology area include the following:

O Information technology and automatic data processing outsourcing services
for commercial clients.

O Information protection and electronic business security services.

O Internet domain name registration and related services provided by the
Company's majority-owned subsidiary, NSI.

O Intranet consulting and network design and implementation services.

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Other Technical Services

The Company provides Technical Services to government and commercial
customers in such other areas as transportation and space. Examples of Other
Technical Services provided by the Company include the following:

O Development, installation and operation of computer and
telecommunications systems for various transportation applications,
including automated toll revenue collection, rail asset and freight
management, intermodal terminal operation, advanced traffic and
congestion management, rail electrification, traffic control, air traffic
control, commercial vehicle electronic clearance and state motor vehicle
registration.

O Strategic planning, operational analysis and evaluation, surface
transportation planning and engineering, software development and
reengineering, safety and human factors research and hazardous material
transportation safety.

O Scientific and computing services to federal agencies involved in global
change research, including processing, utilization and scientific
analysis of space, airborne and ground-based remotely sensed data.

O Security services for the U.S. Government and commercial customers,
including material control and accountability, computer and information
security, technical surveillance countermeasures, intrusion detection,
access control and physical plant threat assessments and vulnerability
analysis.

O Safety, reliability and quality assurance engineering support for NASA's
Space Shuttle and Space Station programs.

O Undersea data collection and transmission systems and services, including
deep water systems, telecommunications cable systems and hydrographic
survey systems and other services in the areas of hydrography, physical
oceanography, diving, vessel operation and management, marine studies and
other maritime studies and analysis.

PRODUCTS

The Company designs, develops and manufactures high-technology Products for
government and commercial customers. Examples of the Company's Products include
the following:

O Automatic equipment identification technology for rail, truck, air and
sea transportation modes.

O Digital and analog recording products, signal reconnaissance data
processors and telecommunications products for the intelligence
community.

RESOURCES

The Technical Services and Products provided by the Company utilize a wide
variety of resources. The Company anticipates the continued availability of the
resources required for the Technical Services and Products provided to
customers. A substantial portion of the computers and other equipment, materials
and subcontracted work required by the Company could be procured from alternate
supply sources. However, with respect to certain products and programs, the
Company depends 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 the affected programs or
products, the Company believes it would not materially affect the profitability
or operations of the Company as a whole.

The availability of skilled employees who have the necessary education
and/or experience in specialized scientific and technological disciplines
remains critical to the future growth and profitability of the Company. Because
of the Company's growth and the competitive business environment, it has become
more difficult to meet all of the Company's needs for such employees in a timely
manner. However, to date, such difficulties have not had a significant impact on
the Company. The Company intends to continue to devote significant

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resources to recruit and retain qualified employees. Further, as an inducement,
the Company maintains a variety of benefit programs for its employees, including
retirement and bonus plans, group life, health, accident and disability
insurance and offers its employees the opportunity to participate in the
Company's employee ownership program. See "Business -- Employees And
Consultants" and "Market for Registrant's Common Equity and Related Stockholder
Matters -- The Limited Market."

MARKETING

The Company's marketing activities are primarily conducted by its own
professional staff of engineers, scientists, analysts and other personnel. The
Company's marketing approach for its Technical Services begins with the
development of information concerning the requirements of the U.S. Government
and other potential customers for the types of Technical Services provided by
the Company. Such information is gathered in the course of contract performance
and from formal briefings, participation in professional organizations and
published literature. This information is then evaluated and exchanged among
marketing groups within the Company (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.

The Company's Products are marketed primarily through the Company's own
sales force, which is augmented by independent sales representatives.

COMPETITION

The businesses in which the Company is engaged are highly competitive. The
Company has a large number of competitors, some of which have been established
longer and have substantially greater financial resources and larger technical
staffs than the Company. Some of the other competitors, although smaller in
size, are more highly specialized. In addition, the U.S. Government's own
in-house capabilities and federal non-profit contract research centers are also
competitors of the Company because they perform certain types of services which
might otherwise be performed by the Company.

The primary competitive factors in the business areas in which the Company
is engaged are technical, management and marketing competence and price. The
Company's continued success is dependent upon its 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 the fiscal years ended January 31, 1998, 1997 and 1996,
approximately 66%, 80% and 83%, respectively, of the Company's contract revenues
from the Technical Services segment and approximately 53%, 61% and 80%,
respectively, of the Company's contract revenues from the Products segment, were
attributable to prime contracts with the U.S. Government or to subcontracts with
other contractors engaged in work for the U.S. Government.

In fiscal years 1998, 1997 and 1996, the U.S. Army accounted for
approximately 11%, 16% and 22%, respectively, of consolidated revenues, the U.S.
Navy accounted for approximately 8%, 10% and 9%, respectively, of consolidated
revenues and the DOE accounted for approximately 5%, 7% and 10%, respectively,
of consolidated revenues.

During fiscal year 1996, approximately 10% of the Company's consolidated
revenues were derived from one U.S. Government contract to automate the
information systems for the DOD's medical treatment facilities worldwide. This
contract was substantially completed in 1997. No other single contract in the
Technical Services segment accounted for 10% or more of consolidated revenues in
fiscal year 1996 and no single contract in the Technical Services segment
accounted for 10% or more of consolidated revenues in fiscal years 1998 or 1997.

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No single customer or contract in the Products segment accounted for 10% or
more of consolidated revenues in fiscal years 1998, 1997 or 1996.

GOVERNMENT CONTRACTS

Many of the U.S. Government programs in which the Company participates 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. In the event
that a contract is terminated for convenience, the Company generally would be
reimbursed for its allowable costs through the date of termination and would be
paid a proportionate amount of the stipulated profit or fee attributable to the
work actually performed.

Modification, termination or curtailment of major programs or contracts of
the Company could have a material adverse effect on the results of the Company's
operations. Although such contract and program terminations have not had a
material adverse effect on the Company in the past, no assurance can be given
that curtailments or terminations of U.S. Government programs or contracts will
not have a material adverse effect on the Company in the future.

The Company's business with the U.S. Government and other customers is
generally performed under cost-reimbursement, time-and-materials, fixed-price
level-of-effort or firm fixed-price contracts. Under cost-reimbursement
contracts, the customers reimburse the Company for its direct costs and
allocable indirect costs, plus a fixed fee or incentive fee. Under
time-and-materials contracts, the Company is 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 the Company for the actual labor hours provided to
the customer at negotiated hourly rates. Under firm fixed-price contracts, the
Company is required to provide stipulated products or services for a fixed
price. Because the Company assumes the risk of performing a firm fixed-price
contract at the stipulated 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 particular firm
fixed-price contracts.

During the fiscal years ended January 31, 1998, 1997 and 1996,
approximately 50%, 57% and 57%, respectively, of the Technical Services revenues
were derived from cost-reimbursement type contracts and approximately 32%, 20%
and 16%, respectively, of the Technical Services revenues were from firm
fixed-price type contracts, with the balance from time-and-materials and
fixed-price level-of-effort type contracts. In contrast, the majority of the
Products revenues in these three years were derived from firm fixed-price type
contracts.

Any costs incurred by the Company prior to the execution of a contract or
contract amendment are incurred at the Company's risk, and it is possible that
such costs will not be reimbursed by the customer. Unbilled receivables in this
category which were included in the Technical Services revenues and Product
revenues, exclusive of related fees, at January 31, 1998 were $14,583,000 and
$664,000, respectively. The Company expects to recover substantially all such
costs; however, no assurance can be given that the contracts or contract
amendments will be received or that the related costs will be recovered.

Contract costs for services or products supplied to the U.S. Government,
including allocated indirect costs, are subject to audit and adjustments by
negotiations between the Company and U.S. Government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through the fiscal year ended January 31, 1997. Contract revenues for subsequent
years have been recorded in amounts which are expected to be realized upon final
settlement. However, no assurance can be given that audits and adjustments for
subsequent years will not result in decreased revenues or profits for those
years.

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PATENTS AND PROPRIETARY INFORMATION

Bellcore's patent portfolio consists of more than 680 U.S. and foreign
patents. More than 200 of these patents have been licensed to organizations
worldwide. Bellcore 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. Bellcore also actively pursues additional opportunities to license its
technologies to third parties and evaluates potential spin-offs of technologies
that it has developed.

Other than the business and operations of Bellcore, the nature of the
Technical Services and Products provided by the Company is such that the Company
does not presently consider its competitive position to be dependent upon patent
protection. The Company claims a proprietary interest in certain of its
products, software programs, methodology and know-how. Such proprietary
information is protected by copyrights, trade secrets, licenses, contracts and
other means.

The U.S. Government has certain rights to data, computer codes and related
material developed by the Company 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 developed by the Company under the subcontract.

BACKLOG

Backlog includes only the funded dollar amount of contracts in process and
does not include the dollar amount of projects for which the Company has 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 for the Technical Services segment at January 31, 1998 and 1997
amounted to approximately $2,520,000,000 and $1,112,000,000, respectively, and
the backlog for the Products segment at those dates amounted to approximately
$43,000,000 and $82,000,000, respectively. The Company expects that a
substantial portion of its backlog at January 31, 1998 will be recognized as
revenues prior to January 31, 1999. Some contracts associated with the backlog
are incrementally funded and may continue for more than one year.

EMPLOYEES AND CONSULTANTS

As of January 31, 1998, the Company and its subsidiaries employed
approximately 30,300 persons. The Company also utilizes the services of
consultants to provide specialized technical and other services on specific
projects.

The highly technical and complex services and products provided by the
Company are dependent upon the availability of professional, administrative and
technical personnel having high levels of training and skills. Because of the
Company's growth and competitive business environment, it has become more
difficult to meet all of the Company's needs for such employees in a timely
manner. However, to date, such difficulties have not had a significant impact on
the Company. The Company intends to continue to devote significant resources to
recruit and retain qualified employees. Management believes the Company's
orientation towards employee ownership is a major factor in the Company's
ability to attract and retain qualified personnel.

None of the Company's employees are represented by a labor union. To date,
no strikes or work stoppages have been experienced and the Company considers its
relations with its employees to be good.

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RISK FACTORS

The following risk factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact or may have a significant impact on the Company's business, operating
results or financial condition. Actual results could differ materially from
those projected in the forward-looking statements as a result of the following
risk factors set forth below.

CONCENTRATION OF REVENUE

Revenues generated from the sale of the Company's Technical Services and
Products to the U.S. Government as a prime contractor or subcontractor accounted
for 66%, 79% and 83% of revenues in fiscal years 1998, 1997 and 1996,
respectively. U.S. Government spending has declined in recent years, and the
current Congress and presidential administration have indicated that they intend
to further reduce U.S. Government spending. In addition, revenues from the U.S.
Government continues to shift toward lower cost service type contracts. The loss
of a substantial amount of government business could have a material adverse
effect on the Company's results of operations and financial condition. In
addition, Bellcore has historically derived substantially all of its revenues
from the RBOCs. Although the Company has made progress in its efforts to
diversify its business, it remains heavily dependent upon business with the U.S.
Government and with the RBOCs, and there can be no assurances that the Company
will be successful in expanding its customer base or that any new customers will
place orders for the Company's Technical Services or Products in amounts
comparable to those of the U.S. Government or the RBOCs. See "Business -- The
Company" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

POTENTIAL IMPACT OF ACQUISITION OF BELLCORE

On November 14, 1997, pursuant to a definitive agreement, the Company
completed its acquisition of Bellcore, a global provider of software,
engineering and consulting services, advanced research and development,
technical training and other services to the telecommunications industry. As of
January 31, 1998, Bellcore had approximately 5,400 employees and annual revenues
of approximately $1 billion. The acquisition resulted in a substantial growth in
both the employee base and commercial revenues of the Company. The Company
financed a portion of the purchase price of Bellcore with debt financing. Such
growth and additional debt may place a significant strain on the Company's
management, operational and financial resources. There can be no assurance that
the Company will be able to effectively manage the expansion of its operations
or that the Company's systems, procedures or controls will be adequate to
support the integration of the acquired business. Any inability to effectively
integrate the acquired business or manage the growth could have a material
adverse effect on the Company's results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON ACQUISITIONS FOR GROWTH

A significant portion of the growth in the Company's revenues in recent
years has been achieved through acquisitions of businesses that complement the
Company's Technical Services and Products. Although the Company intends to make
additional acquisitions in the future, the number and size of the acquisitions
that the Company can complete may be limited due to the Company's acquisition of
Bellcore. In addition, while the Company has been successful in identifying and
consummating acquisitions in the past, there can be no assurance that it will be
able to continue to make such acquisitions in the future at prices that it
considers reasonable or, if the acquisitions are consummated, that the Company
will be able to integrate the acquired businesses without adversely affecting
the Company's results of operations and financial condition.

YEAR 2000 COMPLIANCE

The Company has commenced, and in some cases finalized, the evaluation of
computer systems to ensure its operations will not be adversely impacted by Year
2000 software problems. The evaluation determined that certain portions of the
Company's software and systems require modification or replacement. If the
necessary modifications to existing software and conversions to new software are
not made, or are not completed timely,

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the Year 2000 issue could have a material adverse impact on the Company's
consolidated financial position, results of operations, cash flows or its
ability to conduct business. In addition, the Company has initiated
communications with its critical service providers, suppliers and vendors to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no assurance that
such failure would not have a material adverse effect on the Company's
consolidated financial position, results of operations, cash flows or its
ability to conduct business. Furthermore, the Company has implemented an
on-going program to assess its exposure with respect to its products and
services. To date, no matters have come to the attention of the Company's
management that would have a material adverse effect on the Company's
consolidated financial position, results of operations, cash flows or its
ability to conduct business; however, there can be no assurance that the Company
will not be subject to material liability claims in the future.

The Company's assessment of the Year 2000 issue, including the costs of the
project and the timing of completion are based on management's best estimates
and input from third party customers, service providers, suppliers and vendors.
These estimates were derived using numerous assumptions about future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

ABSENCE OF A PUBLIC MARKET

There is no public market for the Class A Common Stock. The Limited Market
permits existing stockholders to offer for sale shares of Class A Common Stock
any Trade Date (as such terms are defined on page 15). Generally, there are four
Trade Dates each year. The Company and the trustees and agents of the Company's
and certain of its subsidiaries' employee benefit plans 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 they, in
their discretion, determine to make such purchases. To the extent that purchases
by such trustees, agents or the Company are not sufficient, the ability of
stockholders to resell their shares in the Limited Market will likely be
adversely affected. In each trade occurring during the last two fiscal years,
all shares of Class A Common Stock offered for sale in the Limited Market were
matched with buy orders and sold in the Limited Market. No assurance, however,
can be given that a stockholder desiring to sell all or a portion of his or her
shares of Class A Common Stock in any future trade will be able to do so. See
"Market for Registrant's Common Equity and Related Stockholder Matters -- The
Limited Market."

CLASS A COMMON STOCK PRICE DETERMINED BY BOARD OF DIRECTORS

The offering price and the price at which the Class A Common Stock trades
in the Limited Market are not, and subsequent prices will not be, determined by
the operation of a market of bargaining buyers and sellers. Instead, the price
is a value established by the Board of Directors pursuant to the Formula and
valuation process described on pages 16, 17 and 18 which the Board of Directors
believes represents a fair market value. The Board of Directors generally has
broad discretion to modify the Formula. The Formula was last modified in April
1998. The Formula does not specifically include variables reflecting all
relevant financial and valuation criteria. The mechanical application of the
Formula, assuming a constant Market Factor, tends to smooth the impact on the
stock price of quarterly fluctuations in the Company's operating results because
the Formula takes into account the net income of the Company for the four
preceding quarters. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Price Range of Class A Common Stock and Class B Common
Stock."

POSSIBLE VOLATILITY OF STOCK PRICE

The Formula Price of the Class A Common Stock could be subject to greater
fluctuations in the future than it has experienced in the past. The increased
volatility is expected to result from a number of factors, including (i) plans
to continue to increase the proportion of the Company's business involving
private sector customers, international customers and information technology and
the greater stock price volatility associated
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with companies in such business areas, (ii) the financial leverage impact of
current and any future debt levels of the Company as debt financing is used to
finance acquisitions and for other purposes, (iii) the impact of other equity
transactions that the Company may pursue, including public offerings of
securities of the Company's subsidiaries or affiliates, and (iv) the volatility
of the stock price of the Class A Common Stock of NSI, a publicly-traded
security of a majority-owned subsidiary of the Company, and its impact on the
Formula Price. As of March 13, 1998, the Company owned 100% of the outstanding
Class B Common Stock of NSI, representing approximately 76% of the combined
outstanding common stock of NSI. The NSI Class B Common Stock is convertible
into NSI Class A Common Stock, subject to certain limitations.

NO ASSURANCES REGARDING FUTURE RETURNS

There can be no assurance that the Class A Common Stock will in the future
provide returns comparable to historical returns or that the Formula Price will
not decline. See "Market for Registrant's Common Equity and Related Stockholder
Matters -- Price Range of Class A Common Stock and Class B Common Stock."

COMPETITION

The businesses in which the Company is engaged are highly competitive. The
Company's competitors include larger organizations with substantially greater
financial resources and larger technical staffs, smaller, more highly
specialized entities, the U.S. Government's own in-house capabilities and
federal non-profit contract research centers. The Company's continued success is
dependent upon its ability to provide superior service and performance on a
cost-effective basis. See "Business -- Competition."

EARLY TERMINATION OF GOVERNMENT CONTRACTS

Many of the U.S. Government programs in which the Company participates 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. Modification, termination or curtailment of major programs or
contracts of the Company could have a material adverse effect on the Company's
results of operations and financial condition. Although such contract and
program modifications, terminations or curtailments have not had a material
adverse effect on the Company in the past, no assurance can be given that they
will not have such an effect in the future.

POTENTIAL GOVERNMENT INQUIRIES AND INVESTIGATIONS

The Company is from time to time subject to certain U.S. Government
inquiries and investigations of its business practices. No assurance can be
given that any such inquiry or investigation would not have a material adverse
effect on the Company's results of operations and financial condition.

CONTRACT REVENUES SUBJECT TO AUDITS BY GOVERNMENT AGENCIES

FIXED PRICE CONTRACT EXPOSURE

During the fiscal years ended January 31, 1998, 1997 and 1996, 32%, 20% and
16%, respectively, of Technical Services revenues were from firm fixed-price
type contracts, while the majority of Products revenues in these three years
were derived from such contracts. Because the Company assumes the risk of
performing a firm fixed-price contract at the stipulated 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 particular firm fixed-price contracts.
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AT RISK CONTRACT COSTS

Any costs incurred by the Company prior to the execution of a contract or
contract amendment are incurred at the Company's risk, and it is possible that
such costs will not be reimbursed by the customer. Unbilled receivables in this
category which were included in Technical Services revenues and Products
revenues, exclusive of related fees, at January 31, 1998 were $14,583,000 and
$664,000, respectively. The Company expects to recover substantially all such
costs; however, no assurance can be given that the contracts or contract
amendments will be received or that the related costs will be recovered.

RISKS ASSOCIATED WITH INTERNATIONAL SALES AND CURRENCY EXCHANGES

The Company conducts a portion of its business outside of the U.S. in
transactions denominated in foreign currencies. As a result, the Company is
exposed to fluctuations in exchange rates which could result in losses and, in
turn, could adversely impact the Company's results of operations. Under the
Company's current foreign currency management policy, the Company may use
forward foreign currency exchange rate contracts to hedge against movements in
exchange rates for contracts executed in foreign currencies. However, the
Company generally does not hedge its exchange rate risks for its foreign
subsidiaries, which generally conduct business in currencies other than the U.S.
Dollar. Significant fluctuations in exchange rates in such countries could have
a material adverse effect on the Company's results of operations. This risk may
be significant for entities such as INTESA that operate in highly inflationary
economies. To date, losses resulting from exchange rate fluctuations have not
had a material adverse impact on the Company's results of operations; however,
there can be no assurance that the Company's future results of operations will
not be materially impacted by exchange rate fluctuations.

NO CASH DIVIDENDS

The Company has never declared or paid any cash dividends on its capital
stock and no cash dividends on the Class A Common Stock or Class B Common Stock
are contemplated in the foreseeable future. The Company's present intention is
to retain any future earnings for use in its business.

RESTRICTIONS ON CLASS A COMMON STOCK

Certain of the shares of Class A Common Stock presently outstanding are,
and all shares of Class A Common Stock offered by the Company will be, subject
to certain restrictions (including a right of first refusal and a right of
repurchase upon termination of employment or affiliation (except that qualified
retiring employees may elect to have the Company defer its repurchase rights for
five years) and other restrictions on their transferability) set forth in the
Company's Certificate of Incorporation.

DEPENDENCE UPON KEY PERSONNEL

The Company's success will depend upon the continued contributions of its
founder, J.R. Beyster, its officers and key personnel, the loss of which could
materially adversely affect the Company's operations. The Company has not
generally entered into long-term employment contracts with its officers and key
employees. In addition, the Company does not maintain "key man" life insurance
for its officers or key employees.

ATTRACTION AND RETENTION OF SKILLED EMPLOYEES

The highly technical and complex services and products provided by the
Company are dependent upon the availability of professional, administrative and
technical personnel having high levels of training and skills. Because of the
Company's growth and competitive business environment, it has become more
difficult to meet all of the Company's needs for such employees in a timely
manner. Competition for such personnel is intense and competitors often employ
aggressive tactics to recruit key employees. The Company intends to continue to
devote significant resources to recruit and retain qualified employees; however,
no assurance can be given that the Company will be able to attract and retain
such employees on acceptable terms. Any failure to do so could have a material
adverse effect on the Company's operations.

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14

ANTI-TAKEOVER EFFECTS

Consistent with and in furtherance of the Company's employee ownership
philosophy, certain provisions of the Company's Certificate of Incorporation and
Bylaws may discourage, delay or prevent attempts to acquire control of the
Company that are not approved by the Company's Board of Directors. The
provisions may, individually or collectively, have the effect of discouraging
takeover attempts that some stockholders might deem to be in their best
interests, including tender offers in which stockholders might receive a premium
for their shares over the Formula Price, as well as making it more difficult for
individual stockholders or a group of stockholders to elect directors.

ITEM 2. PROPERTIES

As of March 31, 1998, the Company conducted its operations in more than 370
offices and manufacturing and laboratory facilities located in 41 states, the
District of Columbia and various foreign countries and occupied a total of
approximately 7,900,000 square feet of space. The Company has principal
locations in the San Diego, California, the Washington, D.C. and Piscataway, New
Jersey metropolitan areas and occupies over 1,000,000 square feet of space in
each of these locations.

The Company owns and occupies seven buildings totaling approximately
677,000 square feet of space situated on 22.2 acres of land owned by the Company
in the Golden Triangle area of San Diego, California.

At the principal location of the Company in McLean, Virginia, the Company
owns and occupies a 287,000 square foot building located on 10 acres of land and
leases two buildings containing a total of approximately 425,000 square feet of
space. The Company has certain rights to purchase these leased buildings. The
Company has also executed a lease to occupy an additional 195,000 square foot
building in McLean, Virginia, upon completion of this building scheduled for
December 1999. In addition, the Company owns and occupies a 62,000 square foot
building on 2.6 acres of land in Reston, Virginia.

In the Chester, Piscataway and Red Bank, New Jersey areas, the Company owns
and occupies 13 buildings totaling approximately 725,000 square feet of space
situated on 206 acres of land. The Company also owns an additional 26 acres of
vacant land in Piscataway, New Jersey.

The Company also owns and occupies (a) a 62,500 square foot building on
approximately 13 acres of land in Virginia Beach, Virginia, (b) an 83,000 square
foot building on approximately 8.4 acres of land in Oak Ridge, Tennessee, (c)
two buildings totaling 79,400 square feet on 4.5 acres in Dayton, Ohio, (d) a
100,000 square foot building on 18 acres in Huntsville, Alabama, (e) a 95,500
square foot building on approximately 7.3 acres of land in Columbia, Maryland
and (f) a 23,700 square foot building on approximately 3.1 acres of leased land
in Richland, Washington. The Company also leases a 30,000 square foot office
building in Orlando, Florida and has an option to purchase this building. In
addition, the Company leases a 380,000 square foot building in Lisle, Illinois.

The nature of the Company's business is such that there is no practicable
way to relate occupied space to industry segments. The Company considers its
facilities suitable and adequate for its present needs. See Note M of Notes to
Consolidated Financial Statements of the Company on page F-25 of this Form 10-K
for information regarding commitments under leases.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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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 to the Company's definitive Proxy
Statement used in connection with the solicitation of votes for the Company's
1998 Annual Meeting of Stockholders (the "1998 Proxy Statement").

The following is a list of the names and ages (as of April 10, 1998) of all
Executive Officers of the Company, indicating all positions and offices with the
Company 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.

NAME OF EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE
------------------------- --- --------------------------------------------------------

D. P. Andrews................ 53 Corporate Executive Vice President since January 1998 and
a Director since October 1996. Mr. Andrews has held
various positions with the Company since 1993, including
serving as Executive Vice President for Corporate
Development from October 1995 to January 1998. Prior to
joining the Company, Mr. Andrews served as Assistant
Secretary of Defense from 1989 to 1993.
D. W. Baldwin................ 45 Senior Vice President and Treasurer since January 1997.
Mr. Baldwin has held various positions with the Company
since 1978, including serving as a Senior Vice President
from 1992.
J. R. Beyster................ 73 Chairman of the Board, Chief Executive Officer and a
Director of the Company since the Company was founded and
President of the Company until 1988.
D. A. Cox.................... 50 Executive Vice President since January 1998. Mr. Cox has
held various positions with the Company since 1988,
including serving as a Sector Vice President from January
1996 to January 1998.
J. E. Glancy................. 52 Corporate Executive Vice President since January 1994 and
a Director of the Company since July 1994. Dr. Glancy has
held various positions with the Company since 1976,
including serving as a Sector Vice President from 1991 to
1994.
J. D. Heipt.................. 55 Senior Vice President for Administration and Secretary of
the Company since 1984. Mr. Heipt has held various
positions with the Company since 1979.
W. A. Owens.................. 57 President and Chief Operating Officer since February
1997. Mr. Owens will resign from these positions
effective as of June 1, 1998. Mr. Owens also served as
Vice Chairman of the Board from March 1996 to April 1998.
Prior to joining the Company, Mr. Owens served as an
Admiral in the U.S. Navy, serving as Vice Chairman of the
Joint Chiefs of Staff from 1993 to 1997 and as the Deputy
Chief of Naval Operations for Resources, Warfare
Requirements and Assessments from 1991 to 1993.
P. N. Pavlics................ 37 Senior Vice President since January 1997 and Controller
of the Company since 1993. Mr. Pavlics has held various
positions with the Company since 1985, including serving
as a Corporate Vice President from 1993 to January 1997.
S. D. Rockwood............... 55 Executive Vice President of the Company since April 1997
and Director of the Company since 1996. Dr. Rockwood has
held various positions with the Company since 1986,
including serving as a Sector Vice President from 1987 to
April 1997.
W. A. Roper, Jr.............. 52 Senior Vice President and Chief Financial Officer of the
Company since 1990.
R. A. Rosenberg.............. 63 Executive Vice President of the Company since 1992. Mr.
Rosenberg has held various positions with the Company
since 1987.

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NAME OF EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE
------------------------- --- --------------------------------------------------------

D. E. Scott.................. 41 Senior Vice President since January 1997 and General
Counsel of the Company since 1992. Mr. Scott has held
various positions with the Company since 1987, including
serving as a Corporate Vice President from 1992 to
January 1997.
R. C. Smith.................. 56 Chief Executive Officer and a Director of Bell
Communications Research, Inc., a wholly-owned subsidiary
of the Company ("Bellcore"), since January 1998 and a
Director of the Company since April 1998. Prior to
joining Bellcore, Mr. Smith was the Senior Vice
President -- Quality Development and Public Relations for
Sprint Corporation from 1991 to January 1998.
E. A. Straker................ 60 Executive Vice President of the Company since 1994 and a
Director since 1992. Dr. Straker has held various
positions with the Company since 1971, including serving
as a Sector Vice President from 1986 to 1994.
J. H. Warner, Jr............. 57 Corporate Executive Vice President of the Company since
1996 and Director since 1988. Dr. Warner has held various
positions with the Company since 1973, including serving
as Executive Vice President from 1989 to 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

THE LIMITED MARKET

Since its inception, the Company has followed a policy of remaining
essentially employee owned. As a result, there has never been a general public
market for any of the Company's securities. In order to provide liquidity for
its stockholders, however, the Company has maintained a limited secondary market
(the "Limited Market") through its 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 (each a "Trade Date"). Generally,
there are four Trade Dates each year which typically occur approximately two
weeks after Board of Directors' meetings which are 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 five times as many shares of
Class A Common Stock. All sales are made at the prevailing price of the Class A
Common Stock determined by the Board of Directors pursuant to the valuation
process described below. Employees, consultants and directors of the Company who
have been approved by the Board of Directors or the Operating Committee of the
Board of Directors may subscribe to purchase up to a specified number of shares
of Class A Common Stock. In addition, the trustees or agents of the Company's
Employee Stock Retirement Plan ("ESRP"), Cash or Deferred Arrangement ("CODA"),
1995 Employee Stock Purchase Plan, the 1998 Employee Stock Purchase Plan (if
such plan is approved at the Company's 1998 Annual Meeting of Stockholders),
Stock Compensation Plan, Management Stock Compensation Plan, Key Executive Stock
Deferral Plan, the Bell Communications Research Savings and Security Plan and
the Bell Communications Research Savings Plan for Salaried Employees
(collectively, the "Bellcore Savings Plans") and the TransCore Retirement
Savings Plan of Syntonic Technology, Inc., a wholly-owned subsidiary of the
Company doing business as TransCore ("TransCore Savings Plan"), (collectively,
the "Benefit Plans") may also purchase shares of Class A Common Stock for their
respective trusts in the Limited Market. All sellers in the Limited Market
(other than the Company, ESRP, CODA, the Bellcore Savings Plans and the
TransCore Savings Plan) pay Bull, Inc. a commission equal to two percent of the
proceeds from such sales. No commission is paid by purchasers in the Limited
Market.

In the event that 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 and the Company, offers by
stockholders to sell 500 or less shares of Class A Common Stock (or up to the
first 500

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shares if more than 500 shares of Class A Common Stock are offered by any such
stockholder) will be accepted first. Offers to sell shares in excess of 500
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 500 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.

The Company is currently authorized, but not obligated, to purchase up to
1,250,000 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 the Company, in its discretion, determines to make such
purchases. In fiscal years 1998 and 1997, the Company purchased 223,849 shares
and 117,163 shares, respectively, in the Limited Market. The Company's purchases
in fiscal years 1998 and 1997 accounted for 9.7% and 6.6%, respectively, of the
total shares purchased by all buyers in the Limited Market during such years.

During the 1998 and 1997 fiscal years, the trustees of the Company's CODA,
1995 Employee Stock Purchase Plan, the Bellcore Savings Plans and the TransCore
Savings Plan purchased an aggregate of 1,496,518 shares and 1,148,829,
respectively, in the Limited Market. These purchases accounted for approximately
59.0% and 60.9% of the total shares purchased by all buyers in the Limited
Market during fiscal years 1998 and 1997, 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 the Benefit Plans decrease and purchases by the Company 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, no assurance can be given that a stockholder desiring to
sell all or a portion of his or her shares of the Company's Class A Common Stock
in any trade 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, the Company may, but is not obligated to, sell authorized but
unissued shares of Class A Common Stock in the Limited Market. In fiscal years
1998 and 1997, the Company sold an aggregate of 927,657 and 85,505 shares of
Class A Common Stock, respectively, in the Limited Market or 36.6% and 4.5%,
respectively, of the total shares sold by all sellers in the Limited Market
during such years. To the extent that the Company chooses 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. No assurance can be given that an individual desiring to buy shares of
the Company's 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

The price of the Class A Common Stock (the "Formula Price") is established
by the Board of Directors pursuant to the valuation process which includes the
formula set forth below (the "Formula"). The Board of Directors sets the Market
Factor (as defined below) in the Formula at the value which causes the Formula
to yield the price which the Board of Directors believes represents a fair
market value. The Formula Price is the price at which the Class A Common Stock
trades in the Limited Market and is reviewed by the Board of Directors at least
four times each year, generally in conjunction with Board of Directors meetings
which are currently scheduled for January, April, July and October. Pursuant to
the Company's Certificate of Incorporation, the price applicable to shares of
Class B Common Stock is equal to five times the Formula Price. See
"Business -- Risk Factors -- Class A Common Stock Price Determined by Board of
Directors."

The following formula is used in determining the Formula Price: the price
per share is equal to the sum of (i) a fraction, the numerator of which is the
stockholders' equity of the Company at the end of the fiscal quarter immediately
preceding the date on which a price determination is to occur ("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 (ii) a fraction, the
numerator of which is 5.66 multiplied by the market factor ("M" or
16
18

"Market Factor"), multiplied by the earnings of the Company for the four fiscal
quarters immediately preceding the price determination ("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 the
Company in computing diluted earnings per share ("W"). The number of outstanding
common shares and common share equivalents described above assumes the
conversion of each share of Class B Common Stock into five shares of Class A
Common Stock. The 5.66 multiplier is a constant which was first included in the
Formula in March 1976 to cause the price generated by the Formula to equal the
fair market value of the Class A Common Stock as determined by the Board of
Directors following an amendment of the Formula. The 5.66 multiplier has not
been assessed for change since that time. The Market Factor is a numerical
factor which is reviewed and set by the Board of Directors as part of the
valuation process. Historical values for each variable contained in the Formula
are set forth in the table on page 18.

The Formula Price of the Class A Common Stock, expressed as an equation, is
as follows:

Formula Price = E + 5.66 MP
W1 W

A valuation formula containing consideration of stockholder equity and
earnings per share was first used by the Board of Directors in establishing the
stock price of the Class A Common Stock in 1972. The Formula was amended in
1973, by inclusion 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. The Formula was modified by the Board of Directors on April 14,
1995 to delete a limitation that the Formula Price not be less than 90% of the
net book value per share of the Class A Common Stock at the end of the quarter
immediately preceding the date on which a price revision is to occur (the "Book
Value Floor"). This modification was intended to ensure that the Formula Price
would be a fair market value as required by law. The Formula Price has always
exceeded the Book Value Floor, and the Book Value Floor has never been used to
establish the Formula Price. The Formula was also modified by the Board of
Directors on April 10, 1998 so that the Weighted Average Shares Outstanding or
"W" was derived by reference to the Company's "diluted earnings per share"
rather than by reference to the Company's "primary earnings per share." This
modification was made to conform to changes in the accounting standards related
to the calculation of earnings per share. See "Business -- Risk Factors -- Class
A Common Stock Price Determined by Board of Directors."

The Board of Directors has broad discretion to modify the Formula.
Nevertheless, other than the quarterly review and possible modification of the
Market Factor, the Board of Directors will not change the Formula unless (i) in
the good faith exercise of its fiduciary duties and after consultation with the
Company's 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 employees of the
Company, determines that the Formula no longer results in a fair market value
for the Class A Common Stock or (ii) a change in the Formula or the method of
valuing the Class A Common Stock is required under applicable law.

In determining the price of the Class A Common Stock, the Board of
Directors considers the performance of the general securities markets and
relevant industry groups, the historical financial performance of the Company
versus comparable public companies, the prospects for the Company's future
performance, general economic conditions, input from an independent appraisal
firm and other relevant factors. The Board of Directors sets the Market Factor
at the value which causes the Formula to yield a price equal to the Board of
Directors' assessment of a fair market value for the Class A Common Stock. In
conjunction with the Board of Directors' valuation process, an appraisal of
Class A Common Stock is prepared by an independent appraisal firm for the
committees administering the Company's and certain of its subsidiaries'
qualified retirement plans. Valuation input from the appraiser is one of the
factors considered by the Board of Directors in establishing the Formula Price.
The Formula Price and Market Factor, as determined by the Board of Directors,
remains in effect until subsequently changed by the Board of Directors. The
Board of Directors believes that the 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.

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The value assigned by the Board of Directors to the Market Factor has been
subject to larger and more frequent changes. Nonetheless, the Board of Directors
continues to use the Formula in determining the Formula Price. The price of the
Class A Common Stock and the Market Factor could be subject to greater
fluctuations in the future than in the past due to a number of factors,
including (i) plans to continue to increase the proportion of the Company's
business involving private sector customers, international customers and
information technology and the greater stock price volatility associated with
companies in such business areas, (ii) the financial leverage impact of current
and any future debt levels of the Company as debt financing is used to finance
acquisitions and for other purposes, (iii) the impact of other equity
transactions that the Company may pursue, including public offerings of
securities of the Company's subsidiaries or affiliates, and (iv) the volatility
of the stock price of the Class A Common Stock of NSI, a publicly-traded
security of a majority-owned subsidiary of the Company, and its impact on the
Formula Price. See "Business -- Risk Factors -- Possible Volatility of Stock
Price."

The following table sets forth information concerning the Formula Price for
the Class A Common Stock, the applicable price for the Class B Common Stock and
each of the variables contained in the Formula, including the Market Factor, in
effect for the periods beginning on the dates indicated. 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. See "Business -- Risk
Factors -- No Assurances Regarding Future Returns."

'W' OR PRICE PRICE
'E' OR 'W(1)' WEIGHTED PER SHARE PER SHARE
MARKET STOCKHOLDERS OR SHARES 'P' OR AVG. SHARES OF CLASS A OF CLASS B
DATE FACTOR EQUITY(1) OUTSTANDING(2) EARNINGS(3) OUTSTANDING(4) COMMON STOCK COMMON STOCK
---- ------ ------------ -------------- ----------- -------------- ------------ ------------

April 12, 1996........ 1.80 459,097,000 50,848,815 57,296,000 51,306,036 $20.41 $102.05
July 12, 1996......... 2.00 476,734,000 51,526,715 57,601,000 51,594,455 $21.89 $109.45
October 11, 1996...... 2.10 482,172,000 51,418,186 58,657,000 51,830,619 $22.83 $114.15
January 10, 1997...... 2.40 507,235,000 52,094,779 62,098,000 52,003,218 $25.96 $129.80
April 11, 1997........ 2.40 527,459,000 52,682,394 63,680,000 52,308,789 $26.55 $132.75
July 11, 1997......... 2.70 559,284,000 53,556,198 67,459,000 52,695,291 $30.01 $150.05
October 10, 1997...... 3.20 583,211,000 54,369,492 70,701,000 53,229,203 $34.78 $173.90
January 9, 1998....... 3.60 663,811,000 55,148,817 71,804,000 53,993,996 $39.13 $195.65
April 10, 1998........ 3.90 754,778,000 57,511,742 84,794,000 54,889,045 $47.22 $236.10

- ---------------
(1)"E" or Stockholders Equity is the stockholders' equity of the Company at the
end of the fiscal quarter immediately preceding the date on which a price
determination is to occur.

(2)"W(1)" or Shares Outstanding is the number of outstanding common shares and
common share equivalents at the end of that fiscal quarter.

(3)"P" or Earnings is the earnings of the Company for the four fiscal quarters
immediately preceding the price determination.

(4)"W" or Weighted Average Shares Outstanding is the weighted average number of
outstanding common shares and common share equivalents for the four fiscal
quarters immediately preceding the price determination, as used by the Company
in computing diluted earnings per share.

HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK

As of March 31, 1998, there were 18,558 holders of record of Class A Common
Stock and 149 holders of record of Class B Common Stock. As of such date,
approximately 93.0% of the Class A Common Stock and approximately 53.3% of the
Class B Common Stock were owned of record by current employees, directors and
consultants of the Company and their respective family members and by various
employee benefit plans of the Company and its subsidiaries.

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20

DIVIDEND POLICY

ITEM 6. SELECTED FINANCIAL DATA

The following data has been derived from consolidated audited financial
statements. The consolidated balance sheet at January 31, 1998 and 1997 and the
related consolidated statements of income and of cash flows for the three years
ended January 31, 1998 and notes thereto appear elsewhere in this Form 10-K.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

YEAR ENDED JANUARY 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

Revenues............................. $3,089,351 $2,402,224 $2,155,657 $1,921,880 $1,670,882
Cost of revenues..................... 2,623,339 2,094,447 1,875,183 1,686,970 1,475,485
Selling, general and administrative
expenses........................... 301,093 191,836 173,742 146,083 120,387
Interest expense..................... 11,682 4,925 4,529 3,468 2,966
Other (income) expense, net.......... (15,864) (2,193) (111) 5,653 2,216
Minority interest in income of
consolidated subsidiaries(1)....... 10,608
Provision for income taxes........... 73,699 49,529 45,018 30,654 28,328
---------- ---------- ---------- ---------- ----------
Net income........................... $ 84,794 $ 63,680 $ 57,296 $ 49,052 $ 41,500
========== ========== ========== ========== ==========
Earnings per share(2):
Basic.............................. $ 1.65 $ 1.30 $ 1.19 $ 1.05 $ .91
========== ========== ========== ========== ==========
Diluted............................ $ 1.55 $ 1.23 $ 1.14 $ 1.02 $ .89
========== ========== ========== ========== ==========
Common equivalent shares:
Basic.............................. 51,349 49,157 48,143 46,605 45,403
========== ========== ========== ========== ==========
Diluted............................ 54,806 51,738 50,285 47,865 46,759
========== ========== ========== ========== ==========

JANUARY 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)

Total assets......................... $2,415,234 $1,012,462 $ 859,290 $ 752,584 $ 611,575
Working capital...................... 94,588 270,553 227,185 173,467 206,580
Long-term debt....................... 145,958 15,227 15,592 14,222 13,437
Long-term liabilities................ 313,677 29,114 18,524 14,733 11,623
Stockholders' equity................. $ 754,778 $ 527,459 $ 458,132 $ 386,760 $ 334,597

- ---------------
(1) Relates to INTESA, the Company's consolidated 60%-owned joint venture, and
NSI, the Company's consolidated 76%-owned subsidiary.

(2) Earnings per share has been restated for 1997, 1996, 1995 and 1994 to
conform with the new Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The Company has never declared or paid cash dividends
on its capital stock and no cash dividends are presently contemplated.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company provides diversified professional and technical services
("Technical Services") involving the application of scientific expertise,
together with computer and systems technology, to solve complex technical
problems for a broad range of government and commercial customers, both in the
U.S. and abroad. In addition, the Company also designs, develops and
manufactures high-technology products ("Products"). The Company's Technical
Services and Products have been primarily sold to departments and agencies of
the U.S. Government. During 1998, the Company completed several key transactions
that have had positive impacts to its consolidated financial position, results
of operations and cash flows and expanded the Company's business with commercial
customers.

On January 2, 1997, the Company formed a foreign joint venture,
Informatica, Negocio y Tecnologia, S.A. ("INTESA"), with Venezuela's national
oil company, Petroleos de Venezuela, S.A., to provide information technology
services in Latin America. Accordingly, the Company consolidated its 60%
majority interest in INTESA, whose fiscal year end is December 31, in its
consolidated financial statements for the year ended January 31, 1998. Since
Venezuela is considered a highly inflationary economy, the functional currency
of INTESA is the U.S. dollar. Remeasurement gains or losses of this joint
venture are recognized in the consolidated results of operations.

On March 7, 1997, the Company sold the majority of the net assets of its
SAIT business unit and recognized a gain of $4 million on the sale which is
reflected in other income. SAIT manufactured data display devices and
"ruggedized" personal computers which accounted for 49% of the Products revenue
in 1997.

On October 1, 1997, the Company and its subsidiary Network Solutions, Inc.
(NSI) sold 3,795,000 shares of NSI Class A common stock in an initial public
offering. The Company's net proceeds from the offering were $64 million
resulting in a gain of $61 million which was recorded as additional paid-in-
capital. Prior to the offering, NSI was a wholly-owned subsidiary of the
Company. Upon completion of the offering, the Company has a 76% ownership
interest in NSI, which represents 97% of the combined voting power of the
outstanding common stock. NSI provides Internet domain name registration
services and Intranet consulting and network design and implementation services.

On November 14, 1997, the Company completed its acquisition (the "Bellcore
Acquisition") of all the issued and outstanding common stock of Bell
Communications Research, Inc. ("Bellcore") from the Regional Bell Operating
Companies ("RBOCs"). Upon the closing of the Bellcore Acquisition, Bellcore
became a wholly-owned subsidiary of the Company and approximately 5,500 Bellcore
employees joined the Company. The acquisition has been accounted for under the
purchase method of accounting and Bellcore's results of operations have been
included in the financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired and liabilities assumed based
upon their estimated fair values. The excess purchase price over the net book
value of assets acquired has been allocated to other identifiable intangible
assets and goodwill. Bellcore is a global provider of software development,
engineering and consulting services, advanced research and development,
technical training and other services to the telecommunications industry.

On January 29, 1998, the Company issued public debt securities with a
principal amount of $100 million. These debt securities are ten year fixed rate
notes with interest paid at 6.75%. Cash proceeds to the Company were $99
million.

RESULTS OF OPERATIONS

Revenues increased 29%, 11% and 12% in 1998, 1997 and 1996, respectively,
over the prior year. INTESA, Bellcore and NSI were directly responsible for 21
percentage points of the increase in 1998. The remaining increase in revenues of
8 percentage points was attributable to internal growth in the traditional
business areas. Revenues in 1998 from the Company's principal customer, the U.S.
Government, continued to

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shift toward lower cost service type contracts. This trend reflects the
increasingly competitive business environment in the Company's traditional
business areas, as well as the Company's increased success in the engineering
and field services markets, which typically involve lower cost service type
contracts.

The sale of Technical Services and Products to the U.S. Government as a
prime contractor or subcontractor accounted for 66% of revenues in 1998, 79% in
1997 and 83% in 1996. The decrease from 1996 to 1998 is primarily attributable
to growth in non-U.S. Government revenues as a result of the Company's efforts
to increase revenues from commercial and international clients and state and
local governments in the health, commercial information technology,
telecommunications and transportation business areas. On an absolute basis, U.S.
Government revenues increased 7% in 1998, 6% in 1997 and 8% in 1996. Non-U.S.
Government revenues increased 109% in 1998, 40% in 1997 and 35% in 1996, over
the prior year. The larger increase in non-U.S. Government revenues in 1998 is
primarily attributable to the Bellcore Acquisition, INTESA and growth in NSI
revenues over 1997.

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

YEAR ENDED JANUARY 31
-----------------------
1998 1997 1996
----- ----- -----

Contract type:
Cost-reimbursement.......................................... 50% 54% 54%
Time-and-materials and fixed-price level-of-effort.......... 18% 22% 26%
Firm fixed-price............................................ 32% 24% 20%
--- --- ---
Total............................................. 100% 100% 100%
=== === ===

Cost-reimbursement contracts provide for the reimbursement of direct costs
and allowable indirect costs, plus a fee or profit component. Time-and-materials
("T&M") contracts typically provide for the payment of negotiated fixed hourly
rates for labor hours incurred plus reimbursement of other allowable direct
costs at actual cost plus allocable indirect costs. Fixed-price level-of-effort
("FP-LOE") contracts are similar to T&M contracts since ultimately revenues are
based upon the labor hours provided to the customer. Firm fixed-price contracts
require the Company to provide stipulated products, systems or services for a
fixed price. The Company assumes greater performance risk on firm fixed-price
contracts and the failure to accurately estimate ultimate costs or to control
costs during performance of the work may result in reduced profits or losses.
The increase in revenues from firm fixed-price contracts and associated relative
decrease in revenues from cost-reimbursement contracts from 1996 to 1998 result
primarily from the Company's growth in non-U.S. Government revenues. The
Company's non-U.S. Government customers typically do not contract on a cost-
reimbursement basis.

The Company's business is directly related to the receipt of contract
awards and contract performance. There were 440 contracts with annual revenues
greater than $1 million in 1998, compared with 412 and 349 such contracts in
1997 and 1996, respectively. These larger contracts represented 71% of the
Company's revenues in 1998 compared to 75% in 1997 and 76% in 1996. Of these
contracts, 39 contracts had individual revenues greater than $10 million in 1998
compared to 28 such contracts in 1997 and 21 in 1996. The remainder of the
Company's revenues are derived from a large number of contracts with individual
revenues less than $1 million. Although the Company has committed substantial
resources and personnel required to pursue and perform larger contracts, the
Company believes it also maintains a suitable environment for the performance of
smaller, highly technical research and development contracts. These smaller
programs often provide the foundation for the Company's success on larger
procurements. Revenues on the Company's contracts are generated from the efforts
of its technical staff as well as the pass through of costs for material and
subcontract efforts, which primarily occur on large, multi-year system
integration type contracts. At the end of 1998, the Company had 30,300 full-time
employees compared to 20,900 and 19,500 at the end of 1997 and 1996,
respectively. Material and subcontract ("M&S") revenues were $755 million in
1998, $667 million in 1997 and $616 million in 1996. As a percentage of total
revenues, M&S revenues decreased to 25% in 1998 from 28% in 1997 and 29% in
1996. The decrease in 1998 is primarily attributable to faster growth in labor-

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related revenues and the sale of SAIT, which decreased M&S revenues in 1998 and
had accounted for 12% of M&S revenues in 1997.

The revenue mix between the Technical Services segment and the Products
segment was 98% and 2%, respectively, of consolidated revenues in 1998, 94% and
6%, respectively, in 1997 and 1996. Within the Technical Services segment,
revenues are further classified between "National Security," "Health,"
"Environment," "Energy," "Telecommunications," "Commercial Information
Technology" and "Other Technical Services." Other Technical Services includes
the transportation, space and other business areas.

National Security revenues were 37% of total revenues in 1998 compared to
44% in 1997 and 45% in 1996. Although National Security revenues declined as a
percentage of total revenues, on an absolute basis, these revenues increased 10%
in 1998, 8% in 1997 and 9% in 1996 over the prior year, in spite of declines in
the overall defense market during these periods. The U.S. Government maintained
funding in the National Security areas in which the Company believes it has
strong capabilities, such as command, control, communications, computers,
intelligence, surveillance and reconnaisance ("C4ISR"), research and
development, training, logistics and simulation. Revenues in the Health business
area were 12% of total revenues in 1998 and 14% in 1997 and 1996. Although
Health revenues declined as a percentage of total revenues, on an absolute
basis, these revenues have increased 9% in 1998, 10% in 1997 and 47% in 1996. In
1996, approximately 10% of consolidated revenues was derived from one U.S.
government contract in the Health business area, which was substantially
completed in 1997. However, to date, the Company has maintained and increased
the level of its revenues in the Health business area through other contracts.
Revenues from the Environment business were 9% of total revenues in 1998, 11% in
1997 and 13% in 1996. Energy revenues were 3% of total revenues in 1998, 4% in
1997 and 6% in 1996. The decreases in the Environment and Energy business areas
primarily reflect the budget reductions and changing priorities of the Company's
U.S. Government and commercial customers. Telecommunications revenues were 8% of
total revenues in 1998 and 1% in 1997 and 1996. The increase in
Telecommunications revenues in 1998 reflects the acquisition of Bellcore which
primarily generates revenues in the Telecommunications segment. Commercial
Information Technology revenues were 14% of total revenues in 1998, 4% in 1997
and 2% in 1996. The increase in Commercial Information Technology revenues
reflects the Company's efforts to increase revenues from commercial and
international clients in the information technology area. INTESA and NSI both
contributed to the growth in Commercial Information Technology revenues. Other
Technical Services revenues were 14% of total revenues in 1998, 15% in 1997 and
12% in 1996. The increase in Other Technical Services revenues as a percent of
total revenues in 1997 compared to 1996 reflects the Company's expansion in the
transportation business area and mirrors the country's shift of priorities and
resources from defense programs to civilian programs in areas such as
transportation. The Company expects this trend of shifting priorities of the
country to continue. In order for the Company to maintain or exceed historical
revenue growth rates, it will need to continue to increase its market share in
the National Security business area and/or increase its revenues from the
Health, Environment, Energy, Telecommunications, Commercial information
technology and Other Technical Services business areas.

Products revenues were 2% of total revenues in 1998 and 6% in 1997 and
1996. The decrease in product revenues as a percentage of total revenues is
attributable to the sale of SAIT in 1998.

The cost of revenues as a percentage of revenues was 85.1% in 1998, 87.2%
in 1997 and 87.0% in 1996. The decrease in 1998 reflects the growth in
commercial revenues from Bellcore, INTESA and NSI, which have more of their
associated costs in SG&A as opposed to cost of revenues.

SG&A expenses as a percentage of revenues were 9.8%, 8.0% and 8.1% in 1998,
1997 and 1996, respectively. SG&A is comprised of general and administrative
("G&A"), bid and proposal ("B&P") and independent research and development
("IR&D") expenses. G&A, B&P and IR&D increased as a percentage of revenues due
to the growth in commercial revenues which have more of their associated costs
in SG&A as opposed to cost of revenues. While the level of B&P activity and
costs have historically fluctuated depending on the availability of bidding
opportunities and resources, B&P costs have increased in relation to revenues in
1998. IR&D costs have also historically fluctuated depending on the stage of
development for various hardware and software systems and have increased in
relation to revenues in 1998. G&A costs as a

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percentage of total revenues were 6.4% in 1998 compared to 5.6% in 1997 and 5.8%
in 1996. The increase in G&A costs represents the combination of the growth in
commercial business and increased acquisition costs incurred in connection with
the Bellcore Acquisition. In 1998 and 1997, continued declining operating
results of certain acquired companies made the recovery of certain goodwill
unlikely as determined by the undiscounted cash flow method. The Company reduced
goodwill by $2.9 million and $6.2 million to its estimated recoverable value in
1998 and 1997, respectively. The Company continues to closely monitor G&A
expenses as part of an on-going program to control indirect costs.

Operating profit margins by segment are strongly correlated to the
Company's financial performance on the contracts within each segment. The
operating profit margin in the Technical Services segment was 5.5% in 1998, 4.8%
in 1997 and 5.0% in 1996. The National Security operating profit margin was 4.2%
in 1998, 5.2% in 1997 and 5.0% in 1996. The lower operating profit margin in
1998 as compared to 1997 and 1996 was a result of overruns on certain firm
fixed-price contracts in the National Security area. Health operating profit
margin was 8.0% in 1998, 7.2% in 1997 and 6.1% in 1996. Environment operating
profit margin was 4.5% in 1998, 2.1% in 1997 and 4.4% in 1996. The lower
operating profit margin in 1997 was the result of losses on certain contracts in
the local government and private sector markets. Energy operating profit margin
was 4.7% in 1998, 5.7% in 1997 and 5.3% in 1996. Telecommunications operating
profit margin was 11.3% in 1998, 11.8% in 1997 and 7.5% in 1996. The
Telecommunications business area performance in 1998 is dominated by Bellcore.
Commercial Information Technology operating profit margin was 6.6% in 1998, a
loss of 6.1% in 1997 and profit of .4% in 1996. The loss in 1997 primarily
relates to operating losses at NSI. The operating profit margin in Other
Technical Services was 3.2% in 1998, 5.7% in 1997 and 4.4% in 1996. The decrease
in Other Technical Services operating profit margin in 1998 was primarily
attributable to overruns on certain firm fixed-price contracts. The operating
profit margin in the Products segment was a loss of 1.9% in 1998, profit of 5.7%
in 1997 and profit of 4.6% in 1996. The operating loss in 1998 was attributable
to overruns on certain firm fixed-price contracts. In general, overall operating
profit margins for the Company increased in 1998 compared to 1997 and 1996
despite overruns on certain firm fixed-price contracts.

Interest expense in 1998, 1997 and 1996 primarily relates to interest on
building mortgages, deferred compensation, capital lease obligations, notes
payable and borrowings under the Company's revolving credit facilities. Increase
in interest expense was primarily driven by an increase in the average
borrowings outstanding during 1998 compared to 1997 and 1996. Average borrowings
in 1998 increased as a result of financing the acquisition of Bellcore.

Other income, net of other expense, was $16 million in 1998 compared to $2
million in 1997 and $111 thousand in 1996. The increase in other income
represents a combination of effects. Primarily increasing other income was
increased interest income and the gain on sale of SAIT and certain other
business assets. Offsetting the increase in other income was a loss on the
forward treasury lock agreements. The Company entered into these treasury lock
agreements, totaling $200 million, in 1997 to manage exposure to fluctuations in
interest rates on an anticipated, probable issuance of debt that was to be used
to finance the Bellcore acquisition. Due to changes in market conditions, an
unexpected decline in interest rates and availability of cash, the Company only
issued $100 million of debt, thus resulting in the recognition of a loss in
other expense.

The provision for income taxes as a percentage of income before income
taxes was 46.5% in 1998, 43.8% in 1997 and 44.0% in 1996. The higher effective
tax rate in 1998 compared to 1997 and 1996 is primarily attributable to
non-deductible goodwill amortization and non-deductible losses in foreign
operations.

The Bellcore Acquisition has resulted in a substantial growth in both
employee base and commercial revenues in the period since November 14, 1997.
Since the integration of Bellcore is still in its early stages, the growth and
debt brought on by the acquisition could still place a significant strain on the
Company's management, operational and financial resources if the Company does
not effectively manage the expansion of its operations. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the integration of Bellcore. Any inability to effectively integrate
Bellcore or manage the growth could have a material adverse effect on the
Company's results of operations and financial condition. As of January 31, 1998,
the integration of Bellcore has not had an adverse effect on the Company. In
addition,

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25

Bellcore has historically derived substantially all of its revenues from the
RBOCs. In order for Bellcore to maintain or exceed historical revenue growth
rates, it will need to continue to increase its market share from its principal
customers, the RBOCs, or diversify with new customers.

As described in the Notes to Consolidated Financial Statements, during
1998, the Company adopted SFAS No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share ("EPS"). Dual
presentation of basic and diluted EPS for all periods presented is required.
Accordingly, EPS has been restated for 1997 and 1996 to conform with the new
standard. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of shares of common stock
outstanding. Diluted EPS is computed similar to basic EPS except that the
weighted average number of shares of common stock outstanding is increased to
include the effect of stock options and other stock awards granted to employees
under stock-based compensation plans that were outstanding during the period.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in the
financial statements and will be adopted by the Company in 1999. SFAS No. 131
establishes new standards for reporting operating segment information in annual
financial statements and reporting selected information about operating segments
in interim financial statements. The Company will adopt SFAS No. 131 for the
year ending January 31, 1999 and the interim period ending April 30, 2000. In
February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued and revises disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The Company will adopt SFAS No. 132 in 1999. Since
these statements address disclosure and reporting issues, adoption of these
statements will not have a material effect on the Company's consolidated
financial position or results of operations.

The Company has commenced, and in some cases finalized, the evaluation of
computer systems to ensure its operations will not be adversely impacted by the
Year 2000 software problems. In 1996, the Company initiated a program to prepare
the Company's centralized internal computer systems and applications for the
Year 2000. The evaluation determined that certain portions of the Company's
software and systems required modification or replacement. Remediation efforts
have begun, with testing and validation to be completed in 1999. The costs
specifically associated with modifying internal-use software for the Year 2000
are expensed as incurred. The costs to modify internal-use software have not
had, nor are they anticipated to have, a material adverse effect on the
Company's consolidated financial position, results of operations, cash flows or
its ability to conduct business.

The Company has initiated communications with its critical service
suppliers and vendors to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues. There
can be no assurance that such failure would not have a material adverse effect
on the Company's systems, results of operations and ability to do business.
Furthermore, the Company has implemented an on-going program to assess its
exposure with respect to its products and services. As part of this program, the
Company is meeting with its significant customers and discussing opportunities
to perform additional services in order to resolve their Year 2000 issues. To
date, no matters have come to the attention of the Company's management that
would have a material adverse effect on its consolidated financial position,
results of operations, cash flows or its ability to conduct business.

The Company's assessment of the Year 2000 issue, including the costs of the
project and timing of completion are based on management's best estimates and
input from third party customers, service providers, suppliers and vendors.
These estimates were derived using numerous assumptions about future events,
including continued availability of certain resources, third party modifications
plans and other factors. However, there can be no assurance that these estimates
will be achieved and actual results could differ materially from those
anticipated.

While the Company does not believe that the Year 2000 matters discussed
above will have a material adverse effect on its consolidated financial
position, results of operations, cash flows and its ability to conduct business,
it is uncertain whether or to what extent the Company may be affected by such
matters.
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26

LIQUIDITY AND CAPITAL RESOURCES

On August 20, 1997, the Company entered into two new credit facilities (the
"Facilities") totaling $900 million with a group of financial institutions which
provide for (i) a five-year reducing revolving credit facility of up to $700
million and (ii) a 364-day revolving credit facility of up to $200 million. The
Facilities were entered into to provide funding for the Bellcore Acquisition and
for general corporate purposes and replace the $105 million unsecured revolving
credit facility. In January 1998, upon issuance of public debt securities, the
Company terminated the 364-day revolving credit facility. The Company is subject
to certain financial covenants under the terms of the credit facility and was in
compliance with these covenants at the end of 1998.

The Company's primary sources of liquidity continue to be funds provided by
operations and the Five-Year revolving credit facility. In 1998, the issuance of
public debt securities was a source of liquidity for the Company. At January 31,
1998 and 1997, there were no borrowings outstanding under either the new or old
credit agreements, respectively, and cash and cash equivalents and short-term
investments totaled $230 million and $45 million, respectively. Cash flows
generated from operating activities were $351 million in 1998 compared to $111
million in 1997 and $53 million in 1996. Average revenue days outstanding
decreased to 68 in 1998 from 74 in 1997 and 1996. The Company continues to
actively monitor receivables with emphasis placed on collection activities and
the negotiation of more favorable payment terms.

Cash flows spent on investing activities were $397 million in 1998 compared
to $57 million and $39 million in 1997 and 1996, respectively. The increase in
spending on investing activities in 1998 and 1997 is primarily attributable to
business acquisitions and the acquisition of capital assets. The primary use of
cash in 1998 was the Bellcore Acquisition. Although the Company used $340
million of cash for acquisitions of certain business assets, net of cash
acquired, in 1998, the Company also received proceeds of $48 million from the
sale of SAIT and other smaller business assets. The Company spent $23 million
for acquisitions of businesses in 1997 to complement the Company's capabilities
in the areas of commercial information technology, transportation and national
security. In 1996, $21 million was spent to acquire equity interests in
commercial and international businesses. The Company intends to continue to make
additional acquisitions and equity investments in the future. Capital
expenditures, excluding land and buildings, were $52 million, $38 million and
$31 million in 1998, 1997 and 1996, respectively, and are expected to be
approximately $78 million for 1999. Expenditures for land and buildings were $18
million, $5 million and $1 million in 1998, 1997 and 1996, respectively, and are
expected to be approximately $18 million for 1999.

The Company generated $191 million from financing activities in 1998
compared to a use of cash of $31 million and $19 million in 1997 and 1996,
respectively. In 1998, the primary sources of cash were the proceeds from
issuing public debt securities, proceeds from the initial public offering of NSI
common stock and proceeds from the sale of the Company's common stock. In 1997
and 1996, funds were utilized primarily for common stock repurchases and
payments on long-term debt. The increase in common stock repurchases in 1997
from 1996 was primarily attributable to increased repurchases of common stock
from the Company's Employee Stock Retirement Plan ("ESRP") in order for the ESRP
to fund payouts to participants.

The Company's cash flows from operations plus borrowing capacity are
expected to provide sufficient funds for the Company's operations, common stock
repurchases, capital expenditures and future long-term debt requirements. In
addition, acquisitions and equity investments in the future are expected to be
financed from operations and borrowing capacity as well as the issuance of
Company common stock.

EFFECTS OF INFLATION

Over half of the Company's contracts are cost-reimbursement type contracts
or are completed within one year. As a result, the Company has been able to
anticipate increases in costs when pricing its contracts. Bids for longer term
firm fixed-price and T&M type contracts typically include labor and other cost
escalations in
25
27

amounts expected to be sufficient to cover cost increases over the period of
performance. Consequently, because costs and revenues include an inflationary
increase commensurate with the general economy, net income, as a percentage of
revenues, has not been significantly impacted by inflation. As the Company
expands into the international markets and into highly inflationary economies,
movements in foreign currency exchange rates may impact the Company's results of
operations. Currency exchange rate fluctuations may also affect the Company's
competitive position as a result of its impact on the Company's profitability
and the pricing offered to its non-U.S. customers.

FORWARD-LOOKING INFORMATION

The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company or its officers with respect to, among other things,
trends affecting the Company's financial condition or results of operation and
the impact of competition. Such statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statements as a result of various
factors. Some of these factors include, but are not limited to: a decrease in or
the failure to increase business with the U.S. Government; the ability of the
Company to effectively continue integrating Bellcore; the ability of Bellcore to
maintain or increase its market share with the RBOCs (Bellcore's principal
customers), or diversify with new customers; the ability of the Company to
continue to identify and consummate additional acquisitions; the ability of the
Company to competitively price its Technical Services and Products; the risk of
early termination of U.S. Government contracts; the risk of losses or reduced
profits on firm fixed-price contracts; a failure to obtain reimbursement for
costs incurred prior to the execution of a contract or contract modification;
audits of the Company's costs, including allocated indirect costs, by the U.S.
Government; the ability of the Company and third party customers, service
providers and suppliers to address the Year 2000 issue and other uncertainties,
all of which are difficult to predict and many of which are beyond the control
of the Company. Due to such uncertainties and risks, readers are cautioned not
to place undue reliance on such forward-looking statements, which speak only as
of the date hereof.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information with respect to the executive officers of the Company, see
"Executive Officers of the Registrant" at the end of Part I of this Form 10-K.
For information with respect to the Directors of the Company, see "Election of
Directors" appearing in the 1998 Proxy Statement, which information is
incorporated by reference into this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

For information with respect to executive compensation, see the information
set forth under the captions "Directors' Compensation," "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation" in the 1998
Proxy Statement, which information (except for the information under the
sub-captions "Compensation Committee Report on Executive Compensation" and
"Stockholder Return Performance Presentation") is incorporated by reference into
this Form 10-K.

26
28

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

For information with respect to the security ownership of certain
beneficial owners and management, see the information set forth under the
caption "Beneficial Ownership of the Company's Securities" in the 1998 Proxy
Statement, which information is incorporated by reference into this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information with respect to the interests of the Company's management
and others in certain transactions, see the information set forth under the
caption "Certain Relationships and Related Transactions" in the 1998 Proxy
Statement, which information is incorporated by reference into this Form 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

1. FINANCIAL STATEMENTS

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

2. FINANCIAL STATEMENT SCHEDULES

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

3. EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------

3(a) Restated Certificate of Incorporation of the Registrant, as
amended July 19, 1990. Incorporated by reference to Exhibit
3(a) to Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1991 (the "1991 10-K").
3(b) Bylaws of the Registrant, as amended through April 11, 1997.
Incorporated by reference to Exhibit 3(b) to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended
January 31, 1997 (the "1997 10-K").
10(a)* Registrant's Bonus Compensation Plan, as amended through
October 2, 1996.
10(b)* Registrant's 1992 Stock Option Plan, as amended through
October 2, 1996.
10(c)* Registrant's Stock Compensation Plan, as amended through
December 30, 1997.
10(d)* Registrant's Management Stock Compensation Plan, as amended
through December 30, 1997.
10(e)* 1995 Employee Stock Purchase Plan. Incorporated by reference
to Annex II to the Registrant's Proxy Statement for the 1995
Annual Meeting of Stockholders as filed June 1995 with the
SEC.
10(f)* 1995 Stock Option Plan, as amended through October 2, 1996.
10(g)* Registrant's Keystaff Deferral Plan, as amended through
December 30, 1997.
10(h)* Registrant's Key Executive Stock Deferral Plan. Incorporated
by reference to Exhibit 4(s) to Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 1996.
10(i)* Form of Alumni Agreement. Incorporated by reference to
Exhibit 4(w) to the 1997 10-K.
10(j) Credit Agreement (multi-year facility) with Bank of America
NT&SA, Morgan Guaranty Trust Company, Citicorp USA, Inc. and
other financial institutions dated as of August 20, 1997.
Incorporated by reference to Exhibit 10(d) to the Form 10-Q
for the fiscal quarter ended July 31, 1997 ("July 1997
10-Q").

* Executive Compensation Plans and Arrangements

27
29

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------

10(k)* Letter Agreement dated January 18, 1996 between Registrant
and W.A. Owens, as amended on March 30, 1998.
10(l)* Employment Agreement dated December 18, 1997 between
Registrant and R.C. Smith, as amended on February 2, 1998.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants
27 Financial Data Schedule.
28(a) Annual Report of the Registrant's 1995 Employee Stock
Purchase Plan for the plan year ended January 31, 1998.
28(b) Annual Report of the Registrant's Cash or Deferred
Arrangement for the plan year ended December 31, 1997.
28(c) Annual Report of the Registrant's subsidiary's (Syntonic
Technology, Inc. doing business as TransCore), TransCore
Retirement Savings Plan for the plan year ended December 31,
1997.
28(d) Annual Report of the Bell Communications Research Savings
and Security Plan for the plan year ended December 31, 1997.
28(e) Annual Report of the Bell Communications Research Savings
Plan for Salaried Employees for the plan year ended December
31, 1997.

(b) REPORTS ON FORM 8-K IN THE FOURTH QUARTER OF THE FISCAL YEAR ENDED
JANUARY 31, 1998:

A Report on Form 8-K was filed on November 26, 1997. Disclosure was made
under Item 2 -- Acquisition or Disposition of Assets.

A Report on Form 8-K was filed on January 14, 1998. Disclosure was made
under Item 5 -- Other Events.

A Report on Form 8-K was filed on January 15, 1998. Disclosure was made
under Item 5 -- Other Events, and Item 7 -- Financial Statements and Exhibits.

* Executive Compensation Plans and Arrangements

28
30

SIGNATURES

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

Dated: April 10, 1998.

SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION
(Registrant)

By /s/ J. R. BEYSTER
------------------------------------
J. R. Beyster
Chairman of the Board and
Chief Executive Officer

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ J. R. BEYSTER Chairman of the Board and April 10, 1998
- -------------------------------------------------------- Principal Executive Officer
J. R. Beyster

/s/ W. A. ROPER, JR. Principal Financial Officer April 10, 1998
- --------------------------------------------------------
W. A. Roper, Jr.

/s/ P. N. PAVLICS Principal Accounting Officer April 10, 1998
- --------------------------------------------------------
P. N. Pavlics

/s/ D. P. ANDREWS Director April 10, 1998
- --------------------------------------------------------
D. P. Andrews

/s/ V. N. COOK Director April 10, 1998
- --------------------------------------------------------
V. N. Cook

/s/ W. H. DEMISCH Director April 10, 1998
- --------------------------------------------------------
W. H. Demisch

/s/ W. A. DOWNING Director April 10, 1998
- --------------------------------------------------------
W. A. Downing

/s/ J. E. GLANCY Director April 10, 1998
- --------------------------------------------------------
J. E. Glancy

/s/ B. R. INMAN Director April 10, 1998
- --------------------------------------------------------
B. R. Inman

29
31

SIGNATURE TITLE DATE
--------- ----- ----

/s/ A. K. JONES Director April 10, 1998
- --------------------------------------------------------
A. K. Jones

/s/ H. M. J. KRAEMER, JR. Director April 10, 1998
- --------------------------------------------------------
H. M. J. Kraemer, Jr.

/s/ W. M. LAYSON Director April 10, 1998
- --------------------------------------------------------
W. M. Layson

/s/ C. B. MALONE Director April 10, 1998
- --------------------------------------------------------
C. B. Malone

/s/ J. W. MCRARY Director April 10, 1998
- --------------------------------------------------------
J. W. McRary

/s/ S. D. ROCKWOOD Director April 10, 1998
- --------------------------------------------------------
S. D. Rockwood

Director
- --------------------------------------------------------
R. C. Smith

/s/ E. A. STRAKER Director April 10, 1998
- --------------------------------------------------------
E. A. Straker

/s/ M. E. TROUT Director April 10, 1998
- --------------------------------------------------------
M. E. Trout

/s/ J. P. WALKUSH Director April 10, 1998
- --------------------------------------------------------
J. P. Walkush

/s/ J. H. WARNER, JR. Director April 10, 1998
- --------------------------------------------------------
J. H. Warner, Jr.

/s/ J. A. WELCH Director April 10, 1998
- --------------------------------------------------------
J. A. Welch

/s/ J. B. WIESLER Director April 10, 1998
- --------------------------------------------------------
J. B. Wiesler

/s/ A. T. YOUNG Director April 10, 1998
- --------------------------------------------------------
A. T. Young

30
32

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

REPORT OF INDEPENDENT ACCOUNTANTS........................... F-2
FINANCIAL STATEMENTS
Consolidated Statement of Income for the three years ended
January 31, 1998.......................................... F-3
Consolidated Balance Sheet at January 31, 1998 and 1997..... F-4
Consolidated Statement of Stockholders' Equity for the three
years ended January 31, 1998.............................. F-5
Consolidated Statement of Cash Flows for the three years
ended January 31, 1998.................................... F-6
Notes to Consolidated Financial Statements.................. F-7

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

F-1
33

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Science Applications International Corporation and its subsidiaries
at January 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICE WATERHOUSE LLP

San Diego, California
April 3, 1998

F-2
34

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED JANUARY 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

Revenues............................................... $3,089,351 $2,402,224 $2,155,657
Costs and expenses:
Cost of revenues..................................... 2,623,339 2,094,447 1,875,183
Selling, general and administrative expenses......... 301,093 191,836 173,742
---------- ---------- ----------
Operating income..................................... 164,919 115,941 106,732
---------- ---------- ----------
Interest expense..................................... 11,682 4,925 4,529
Other (income) expense, net.......................... (15,864) (2,193) (111)
Minority interest in income of consolidated
subsidiaries...................................... 10,608
---------- ---------- ----------
Income before income taxes............................. 158,493 113,209 102,314
Provision for income taxes............................. 73,699 49,529 45,018
---------- ---------- ----------
Net income............................................. $ 84,794 $ 63,680 $ 57,296
========== ========== ==========
Earnings per share:
Basic................................................ $ 1.65 $ 1.30 $ 1.19
========== ========== ==========
Diluted.............................................. $ 1.55 $ 1.23 $ 1.14
========== ========== ==========
Common equivalent shares:
Basic................................................ 51,349 49,157 48,143
========== ========== ==========
Diluted.............................................. 54,806 51,738 50,285
========== ========== ==========

See accompanying notes to consolidated financial statements.

F-3
35

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

ASSETS

JANUARY 31
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)

Current assets:
Cash and cash equivalents................................. $ 189,387 $ 45,279
Restricted cash........................................... 25,344 14,456
Receivables............................................... 810,385 562,950
Inventories............................................... 12,471 33,983
Prepaid expenses and other current assets................. 75,846 17,392
Deferred income taxes..................................... 62,367 37,155
---------- ----------
Total current assets.............................. 1,175,800 711,215
Property and equipment...................................... 288,282 89,027
Land and buildings.......................................... 195,534 96,768
Goodwill.................................................... 106,757 59,569
Other intangible assets..................................... 103,520
Prepaid pension assets...................................... 424,108
Other assets................................................ 121,233 55,883
---------- ----------
$2,415,234 $1,012,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 748,031 $ 273,481
Accrued payroll and employee benefits..................... 262,408 131,234
Income taxes payable...................................... 37,761 16,859
Notes payable and current portion of long-term debt....... 33,012 19,088
---------- ----------
Total current liabilities......................... 1,081,212 440,662
---------- ----------
Long-term debt.............................................. 145,958 15,227
Deferred income taxes....................................... 111,941
Other long-term liabilities................................. 313,677 29,114
Commitments and contingencies (Note N)......................
Minority interest in consolidated subsidiaries.............. 7,668
Stockholders' equity, per accompanying statement:
Class A Common Stock, $.01 par value...................... 519 480
Class B Common Stock, $.05 par value...................... 16 16
Additional paid-in capital................................ 538,760 304,658
Retained earnings......................................... 237,588 232,562
Other stockholders' equity................................ (22,105) (10,257)
---------- ----------
Total stockholders' equity........................ 754,778 527,459
---------- ----------
$2,415,234 $1,012,462
========== ==========

See accompanying notes to consolidated financial statements.

F-4
36

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

COMMON STOCK
---------------------------------
CLASS A CLASS B
--------------- ---------------
100,000,000 5,000,000
SHARES SHARES OTHER
AUTHORIZED AUTHORIZED ADDITIONAL STOCK-
--------------- --------------- PAID-IN RETAINED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------ ---------- -------- --------
(IN THOUSANDS)

Balance at January 31, 1995............... 45,243 $452 343 $17 $201,568 $189,043 $ (4,320)
Issuances of common stock............... 4,115 41 52,600
Repurchases of common stock............. (2,449) (24) (11) (11,456) (30,479)
Income tax benefit from employee stock
transactions.......................... 7,143
Foreign currency translation
adjustment............................ (161)
Unearned stock compensation............. (3,588)
Net income.............................. 57,296
------ ---- --- --- -------- -------- --------
Balance at January 31, 1996............... 46,909 469 332 17 249,855 215,860 (8,069)
Issuances of common stock............... 4,123 41 60,540
Repurchases of common stock............. (3,019) (30) (6) (1) (16,168) (46,978)
Income tax benefit from employee stock
transactions.......................... 10,431
Foreign currency translation
adjustment............................ 1,279
Unearned stock compensation............. (3,467)
Net income.............................. 63,680
------ ---- --- --- -------- -------- --------
Balance at January 31, 1997............... 48,013 480 326 16 304,658 232,562 (10,257)
Issuances of common stock............... 7,207 72 178,977
Repurchases of common stock............. (3,289) (33) (12) (22,489) (79,768)
Net unrealized loss on securities
available for sale.................... (3,691)
Income tax benefit from employee stock
transactions.......................... 16,950
Foreign currency translation
adjustment............................ (3,744)
Unearned stock compensation............. (4,413)
Sale of minority interest in
subsidiary............................ 60,664
Net income.............................. 84,794
------ ---- --- --- -------- -------- --------
Balance at January 31, 1998............... 51,931 $519 314 $16 $538,760 $237,588 $(22,105)
====== ==== === === ======== ======== ========

See accompanying notes to consolidated financial statements.

F-5
37

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED JANUARY 31
--------------------------------
1998 1997 1996
---------- -------- --------
(IN THOUSANDS)

Cash flows from operating activities:
Net income................................................ $ 84,794 $ 63,680 $ 57,296
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 69,860 50,359 35,380
Non-cash compensation................................... 31,051 22,654 13,224
Minority interest in income of consolidated
subsidiaries........................................... 10,524
Equity in income of unconsolidated affiliates........... (1,326) (2,253) (233)
Net (gain) on sales of certain business assets.......... (6,341)
Loss on disposal of property and equipment.............. 3,096 895 1,385
Income tax benefit from employee stock transactions..... 16,950 10,431 7,143
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables........................................... (25,159) (36,134) (71,908)
Inventories........................................... 7,262 8,111 (13,257)
Prepaid expenses and other current assets............. (10,852) (4,496) 2,029
Progress payments..................................... (465) (25,138) 10,660
Deferred income taxes................................. (56,772) (18,202) 1,583
Other assets.......................................... (45,930) (9,628) (4,816)
Accounts payable and accrued liabilities.............. 185,111 46,678 4,701
Accrued payroll and employee benefits................. 10,477 (8,188) 12,637
Income taxes payable.................................. 15,251 1,223 (2,774)
Other long-term liabilities........................... 63,073 10,751 (195)
---------- -------- --------
350,604 110,743 52,855
---------- -------- --------
Cash flows from investing activities:
Expenditures for property and equipment................... (52,450) (37,709) (30,704)
Expenditures for land and buildings....................... (17,633) (4,555) (1,233)
Acquisitions of certain business assets, net of cash
acquired................................................ (340,165) (23,151) 1,475
Purchase of debt securities available for sale............ (40,200)
Proceeds from sales of certain business assets............ 47,974
Proceeds from disposal of property and equipment.......... 5,192 727 332
Investments in affiliates................................. (21,367)
Proceeds from sale of debt securities available for
sale.................................................... 7,576 12,478
---------- -------- --------
(397,282) (57,112) (39,019)
---------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term
debt.................................................... 108,993 3,729 1,856
Payments of notes payable and long-term debt.............. (17,943) (8,200) (6,397)
Principal payments on capital lease obligations........... (8,416) (967) (1,113)
Net proceeds from sale of minority interest in
subsidiary.............................................. 63,528
Sales of common stock..................................... 128,775 19,720 14,834
Repurchases of common stock............................... (83,526) (45,399) (28,454)
---------- -------- --------
191,411 (31,117) (19,274)
---------- -------- --------
Effect of exchange rate changes on cash................... (625)
----------
Increase (decrease) in cash and cash equivalents.......... 144,108 22,514 (5,438)
Cash and cash equivalents at beginning of year............ 45,279 22,765 28,203
---------- -------- --------
Cash and cash equivalents at end of year.................. $ 189,387 $ 45,279 $ 22,765
========== ======== ========
Supplemental schedule of non-cash investing and financing
activities:
Repurchases of common stock upon exercise of stock
options................................................. $ 18,551 $ 17,778 $ 13,505
========== ======== ========
Capital lease obligations for property and equipment...... $ 61,258 $ 38 $ 2,408
========== ======== ========
Long-term mortgage assumed upon purchase of land and
building................................................ $ 6,919
========
Fair value of assets acquired in acquisitions of certain
business assets......................................... $1,246,129 $ 41,881 $ 28,840
Cash paid in the acquisitions of certain business
assets.................................................. (467,902) (24,809) (328)
Issuance of common stock for assets acquired.............. (10,673)
---------- -------- --------
Liabilities assumed in acquisitions of certain business
assets.................................................. $ 778,227 $ 17,072 $ 17,839
========== ======== ========

See accompanying notes to consolidated financial statements.

F-6
38

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation

The consolidated financial statements include the accounts of Science
Applications International Corporation and all majority- and wholly-owned U.S.
and international subsidiaries (collectively referred to as "the Company"). All
significant intercompany transactions and accounts have been eliminated in
consolidation. Investments in affiliates and corporate joint ventures owned
twenty to fifty percent and over which the Company exercises significant
influence are accounted for under the equity method. Other investments are
generally carried at cost. Outside investors' interest in the majority-owned
subsidiaries is reflected as minority interest.

Certain of the Company's majority- and wholly-owned subsidiaries have
fiscal years ending December 31. The financial position and results of
operations of these subsidiaries are included in the Company's consolidated
financial statements as of and for the year ended January 31, 1998. There were
no material intervening events since December 31, 1997 which would materially
affect the consolidated financial position or results of operations.

On January 2, 1997, the Company formed a joint venture, Informatica,
Negocio y Tecnologia, S.A. ("INTESA"), with Venezuela's national oil company,
Petroleos de Venezuela, S.A. ("PDVSA"), to provide information technology
services in Latin America. Accordingly, the Company consolidated its 60%
majority interest in INTESA, whose fiscal year end is December 31, in the
consolidated financial statements for the year ended January 31, 1998.

Use of estimates

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements as well as
the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available
information and actual results could differ from those estimates.

Fair value of financial instruments

It is management's belief that the carrying amounts shown for the Company's
financial instruments, which include cash and cash equivalents, short-term
investments, equity securities, long-term receivables and long-term debt, are
reasonable estimates of their related fair values. The carrying amount of cash
and cash equivalents and short-term investments approximates fair value because
of the short maturity of those instruments. The fair value of equity securities
are based upon quoted market prices. The fair value of long-term receivables is
estimated by discounting the expected future cash flows at interest rates
commensurate with the creditworthiness of customers and other third parties. The
fair value of long-term debt is estimated based on quoted market prices for
similar instruments and current rates offered to the Company for similar debt
with the same remaining maturities.

Contract revenues

The Company's revenues result from contract services performed for
commercial customers and the U.S. Government or from subcontracts with other
contractors engaged in work for the U.S. Government under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others
which are fixed-price or time-and-materials type contracts. Generally, revenues
and fees on these contracts are recognized as services are performed, using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared with total estimated costs at completion. The Company
also derives revenues from software license fees, maintenance contracts and
registration services. Software license fees are

F-7
39
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized when the software has been shipped and there are no significant
obligations remaining. Revenues from maintenance contracts are recognized over
the term of the respective contracts as maintenance services are provided.
Revenues from registration services are recognized on a straight-line basis over
the life of the registration term. Revenues from the sale of manufactured
products are recorded when the products are shipped.

The Company provides for anticipated losses on contracts by a charge to
income during the period in which the losses are first identified. Unbilled
receivables are stated at estimated realizable value. Contract costs on U.S.
Government contracts, including indirect costs, are subject to audit and
adjustment by negotiations between the Company and government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through 1997. Contract revenues on U.S. Government contracts have been recorded
in amounts that are expected to be realized upon final settlement.

Cash and cash equivalents

Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less. Of the $189,387,000 and $45,279,000 total cash
and cash equivalents at January 31, 1998 and 1997, respectively, $175,821,000
and $16,161,000, respectively, was invested in commercial paper, institutional
money market funds and time deposits.

Investment securities

Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held to maturity or available for sale and are recorded at amortized cost and
fair value, respectively. As of January 31, 1998, the Company had $175,821,000
in debt securities classified as cash equivalents held to maturity, $40,200,000
of debt securities classified as available for sale which are included in other
current assets and $5,768,000 of equity securities classified as available for
sale which are included in other assets. As of January 31, 1997, the Company had
$16,161,000 in debt securities classified as cash equivalents held to maturity.
Gross unrealized losses on the Company's available for sale securities were
$3,691,000 as of January 31, 1998.

Restricted cash

The Company's majority-owned subsidiary Network Solutions, Inc. ("NSI") had
an agreement with the National Science Foundation ("NSF") which required NSI to
set aside 30% of the cash collections from domain name registrations to be
reinvested for the enhancement of the intellectual infrastructure of the
Internet. On March 12, 1998, effective April 1, 1998, the NSF amended the
agreement to eliminate this requirement and reduce domain name registration
fees. The Company also has a contract to provide support services to the
National Cancer Institute's Frederick Cancer Research and Development Center
("Center"). As part of the contract, the Company is responsible for paying for
materials, equipment and other direct costs of the Center through the use of a
restricted cash account which is pre-funded by the U.S. Government.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined
using the moving average and first-in, first-out methods.

Buildings, property and equipment

Depreciation and amortization of buildings and related improvements are
provided using the straight-line method over estimated useful lives of thirty to
forty years and ten years, respectively. Depreciation and

F-8
40
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortization of property and equipment are provided over the estimated useful
lives of the assets, primarily using a declining-balance method. The useful
lives are three to ten years for equipment and the shorter of the useful lives
or the terms of the leases for leasehold improvements.

Additions to property and equipment together with major renewals and
betterments are capitalized. Maintenance, repairs and minor renewals and
betterments are charged to expense. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation or amortization are removed
from the accounts and any resulting gain or loss is recognized.

Long-lived assets

The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset.

Goodwill and other intangible assets

Goodwill represents the excess of the purchase cost over the fair value of
net assets acquired in an acquisition. Goodwill and other identifiable
intangible assets are amortized on a straight line method generally over three
to fifteen years. The carrying value of the Company's goodwill and other
intangible assets are reviewed when the facts and circumstances suggest that
they may be permanently impaired. If the review indicates that the intangible
assets may not be recoverable, as determined by the undiscounted cash flow
method, the assets will be reduced to their estimated recoverable value.
Amortization of goodwill and other intangible assets amounted to $16,653,000,
$16,839,000 and $11,044,000 in 1998, 1997 and 1996, respectively. Accumulated
amortization was $60,523,000 and $43,870,000 at January 31, 1998 and 1997,
respectively.

During 1998 and 1997, there was evidence that events and changes in
circumstances made recovery of certain goodwill unlikely. It was estimated that
$2,878,000 and $6,154,000 of the carrying value of goodwill was impaired;
accordingly, those amounts were charged to income in 1998 and 1997,
respectively, and included in selling, general and administrative expense.

Income taxes

Income taxes are provided utilizing the liability method. The liability
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities. Additionally, under the
liability method, changes in tax rates and laws will be reflected in income in
the period such changes are enacted.

Stock-based compensation

Effective February 1, 1996, the Company adopted Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and
elected to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair value of the Company's stock as determined by the Board of
Directors at the date of grant over the amount an employee must pay to acquire
the stock. Pro forma disclosures of net income and earnings per share, as if the
fair value-based method prescribed by SFAS No. 123 had been applied in measuring
compensation expense, are presented in Note L.

Common stock and earnings per share

Class A and Class B Common Stock are collectively referred to as common
stock in the Notes to Consolidated Financial Statements unless otherwise
indicated. A general public market for the Company's

F-9
41
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock does not exist. Periodic determinations of the price of the common
stock are made by the Board of Directors pursuant to a valuation process which
includes a stock price formula. Valuation input from an independent appraisal
firm is one of the factors considered by the Board of Directors in establishing
the stock price. The Board of Directors believes that the 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 Board of Directors
reserves the right to alter the formula and valuation process.

The Company adopted SFAS No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share ("EPS"). Dual
presentation of basic and diluted EPS for all periods presented is required.
Accordingly, EPS has been restated for 1997 and 1996 to conform with the new
standard (Note K). Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of shares of common stock
outstanding. Diluted EPS is computed similar to basic EPS except that the
weighted average number of shares of common stock outstanding is increased to
include the effect of stock options and other stock awards granted to employees
under stock-based compensation plans that were outstanding during the period.

Other financial instruments

The Company initiates hedging activities by entering into currency exchange
agreements consisting principally of currency forward contracts to minimize
revenue and cost variations which could result from fluctuations in currency
exchange rates. These instruments, consistent with the underlying purchase or
sale commitments, typically mature within seven years of origination. In the
event of an early termination of a currency agreement designated as a hedge, the
gain or loss will continue to be deferred and will be included in the settlement
of the underlying transaction. At January 31, 1998, the Company had
approximately $8,359,000 of foreign currency forward exchange contracts in
British pounds sterling, French francs, German marks, Australian dollars and
Spanish pesetas outstanding with net deferred gains of $103,000.

In January 1997, the Company entered into forward treasury lock agreements
for a total of $200,000,000. Such agreements were entered into to manage
exposure to fluctuations in interest rates on an anticipated, probable issuance
of debt that was to be used to finance the acquisition of Bell Communications
Research, Inc. ("Bellcore"). The agreements terminated in January 1998 resulting
in losses. Due to changes in market conditions, an unexpected decline in
interest rates and availability of cash, in January 1998, the Company only
issued ten year fixed rate notes with a principal amount of $100,000,000.
Therefore, a loss of $9,047,000 was recorded as other expense upon termination
of the agreement and a loss of $9,356,000 was deferred, included in long-term
debt and is being amortized to interest expense over the life of the fixed rate
notes (Note J).

Concentration of credit risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
short-term investments, foreign currency forward exchange contracts and long-
term receivables.

The Company invests its excess cash principally in U.S. Government and
municipal debt securities and commercial paper and has established guidelines
relative to diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates.

Concentrations of credit risk with respect to receivables are limited
because the Company's principal customers are the Regional Bell Operating
Companies, various agencies of the U.S. Government and commercial customers
engaged in work for the U.S. government. The credit risk with the U.S.
Government is limited and the financial strength of the Regional Bell Operating
Companies limits the risk on those receivables.

F-10
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign currency

Financial statements of international subsidiaries, for which the
functional currency is the local currency, are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities
and a weighted average exchange rate for revenues, expenses, gains and losses.
Translation adjustments are recorded as a separate component of stockholders'
equity. The functional currency of the Company's foreign subsidiaries that
operate in highly inflationary economies (INTESA and SAIC de Mexico) is the U.S.
dollar. The monetary assets and liabilities of these foreign subsidiaries are
translated into U.S. dollars at the exchange rate in effect at the balance sheet
date. Revenues, expenses, gains and losses are translated at the average
exchange rate for the period, and non-monetary assets and liabilities are
translated at historical rates. Resulting remeasurement gains or losses of these
foreign subsidiaries are recognized in the consolidated results of operations.

Recently issued accounting pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in the
financial statements and will be adopted by the Company in 1999. SFAS No. 131
establishes new standards for reporting operating segment information in annual
financial statements and reporting selected information about operating segments
in interim financial statements. The Company will adopt SFAS No. 131 for the
year ending January 31, 1999 and the interim period ending April 30, 2000. In
February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued and revises disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The Company will adopt SFAS No. 132 in 1999. Since
these statements address disclosure and reporting issues, adoption of the
statements will not have a material effect on the Company's consolidated
financial position or results of operations.

Issuance of stock by subsidiary

Gains or losses on issuances of unissued shares of stock by a subsidiary
are recorded directly to additional paid-in capital. On October 1, 1997, the
Company and its subsidiary NSI completed an initial public offering of 3,795,000
shares of NSI Class A Common Stock. The initial offering price was $18 per share
with net proceeds to the Company of $63,528,000 resulting in a gain of
$60,664,000 which was recorded as additional paid-in capital. Prior to the
offering, NSI was a wholly-owned subsidiary of the Company. Upon completion of
the offering, the Company has a 76% ownership interest in NSI, which represents
97% of the combined voting power of the outstanding common stock. NSI provides
Internet domain name registration services and Intranet consulting and network
design and implementation services.

Reclassifications

Certain amounts from previous years have been reclassified in the
consolidated financial statements to conform to the 1998 presentation.

NOTE B -- ACQUISITIONS AND INVESTMENTS IN AFFILIATES:

The carrying value of the Company's equity investments was $28,990,000 and
$28,979,000 at January 31, 1998 and 1997, respectively, which includes the
unamortized excess of the Company's investments over its equity in the
underlying net assets of $10,891,000 and $13,333,000, respectively.

The Company has made acquisitions of certain business assets and companies
which have been accounted for by the purchase method of accounting. The
operations of the companies and businesses

F-11
43
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquired have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. The excess of the
purchase price over fair value of the net assets acquired has been allocated to
goodwill.

On November 14, 1997, the Company completed its acquisition of all the
issued and outstanding common stock of Bellcore, a global provider of
communications software, engineering, and professional services, pursuant to a
definitive acquisition agreement dated November 20, 1996, as amended. Bellcore
was previously owned by the Regional Bell Operating Companies ("RBOCs"), which
include Ameritech, Bell Atlantic, Bell South, NYNEX, Pacific Telesis Group, SBC
Communications, and US WEST or their affiliates. The aggregate purchase price
was approximately $467,133,000, including deferred transaction costs, and was
funded from the Company's available cash on hand and from bank borrowings,
including borrowings under the Company's revolving credit facilities (Note F).
The Company is in final negotiations and does not anticipate a material change
to the purchase price or assets acquired and liabilities assumed. The
acquisition is being accounted for under the purchase method of accounting and
the results of operations for Bellcore have been included in the financial
statements from the date of acquisition. The purchase price has been allocated
to the assets acquired and liabilities assumed based upon their estimated fair
values. The excess purchase price over the net book value of assets acquired has
been allocated to other identifiable intangible assets and goodwill, which will
be amortized on a straight-line basis over periods of three to fifteen years.

Following is a summary of the purchase price allocation to record assets
and liabilities at estimated fair value (dollar amounts in thousands):

Cash payment to Bellcore owners............................. $ 459,100
Deferred acquisition costs................................ 8,033
---------
Total purchase price...................................... 467,133
---------
Elimination of book value of net assets acquired:
Common Stock........................................... (128,199)
Accumulated deficit.................................... 45,645
Other stockholders' equity............................. (5,548)
---------
Net equity............................................. (88,102)
---------
Excess of purchase price over net book value........... $ 379,031
=========
Allocation of excess purchase price over net book value:
Amount assigned to property and equipment.............. $ 12,946
Amount assigned to land and buildings.................. 45,787
Amount assigned to excess pension plan assets at fair
value over the projected benefit obligation........... 398,235
Deferred tax assets -- non-current..................... 15,202
Deferred tax liabilities -- non-current................ (219,893)
Amount assigned to OPEB liabilities in excess of the
fair value of plan assets............................. (38,123)
Other adjustments, net of deferred taxes............... (3,159)
Amount assigned to identifiable intangible assets...... 105,900
Amount assigned to goodwill............................ 62,136
---------
$ 379,031
=========

F-12
44
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma summary information presents the
consolidated results of operations as if the acquisition had been completed at
the beginning of the periods presented and are not necessarily indicative of the
results of operations of the consolidated Company that might have occurred had
the acquisition been completed at the beginning of the periods specified, nor
are they necessarily indicative of future operating results. Up to the date of
closing, Bellcore derived its revenues principally from the RBOCs, who operated
in a regulatory environment, under service agreements which provided for
recovery of certain regulatory costs, including return on investment.
Furthermore, Bellcore's net income had been based on a statutory return on its
asset base while owned by the RBOCs. In addition to reflecting Bellcore's
results of operations while owned by the RBOCs, the pro forma amounts give
effect to certain adjustments, including the amortization of intangibles and
goodwill, additional depreciation expense, increased interest expense and income
tax effects.

YEAR ENDED JANUARY 31
--------------------------
1998 1997
----------- -----------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER-SHARE AMOUNTS)

Revenues............................................ $3,934,411 $3,412,075
========== ==========
Net income.......................................... $ 66,037 $ 28,595
========== ==========
Basic earnings per share............................ $ 1.29 $ .58
========== ==========
Diluted earnings per share.......................... $ 1.20 $ .55
========== ==========

NOTE C -- BUSINESS SEGMENT INFORMATION:

The Company provides diversified professional and technical services
involving the application of scientific expertise, together with computer and
systems technology, to solve complex technical problems for a broad range of
government and commercial customers, both in the U.S. and abroad. The skills of
the professional staff encompass a variety of scientific and technical
disciplines and the management structure is based upon broad technological
groupings, not necessarily related to any particular industry, line of business,
geographical area, market or class of customer.

For purposes of analyzing and understanding the Company's financial
statements, its operations have historically been classified into two broad
segments: Technical Services and Products. The Technical Services segment is
further classified between the National Security, Health, Environment, Energy,
Telecommunications, Commercial Information Technology and Other business areas.
The Telecommunications and Commercial Information Technology business areas were
reported in the Other business area in 1997 and 1996 and have been reclassified
to conform with the 1998 presentation. Other business areas include
transportation and space. In 1998, the Company sold a business unit which
manufactured data display devices and "ruggedized" personal computers and which
accounted for 49% of the Products revenue in 1997.

Technical Services consist of basic and applied research services; design
and development of computer software; systems integration; systems engineering;
technical operational and management support services; environmental
engineering; design and integration of network systems; technical engineering
and consulting support services; and development of new and existing systems,
polices, concepts and programs.

Products include custom designed and standard hardware and software
products such as automatic equipment identification technology, sensors and
nondestructive imaging instruments. These products typically incorporate Company
developed hardware and software, as well as hardware and software manufactured
by others.

F-13
45
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Industry segment information is as follows:

YEAR ENDED JANUARY 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)

Contract revenues:
Technical Services --
National Security................. $1,148,150 $1,047,831 $ 967,797
Health............................ 361,773 333,294 304,225
Environment....................... 292,940 266,673 279,143
Energy............................ 106,880 107,690 136,610
Telecommunications................ 259,062 27,304 27,864
Commercial Information
Technology...................... 430,003 105,598 45,146
Other............................. 420,419 368,338 263,073
Products............................. 70,124 145,496 131,799
---------- ---------- ----------
Total revenues......................... $3,089,351 $2,402,224 $2,155,657
========== ========== ==========

Operating income (loss):
Technical Services --
National Security................. $ 48,396 $ 54,117 $ 48,720
Health............................ 28,773 23,948 18,612
Environment....................... 13,328 5,624 12,313
Energy............................ 5,026 6,092 7,174
Telecommunications................ 29,223 3,213 2,087
Commercial Information
Technology...................... 28,284 (6,406) 194
Other............................. 13,247 21,012 11,631
Products............................. (1,358) 8,341 6,001
---------- ---------- ----------
Operating income....................... $ 164,919 $ 115,941 $ 106,732
========== ========== ==========

Identifiable assets:
Technical Services --
National Security................. $ 286,639 $ 218,415 $ 212,376
Health............................ 94,606 146,307 118,456
Environment....................... 63,300 60,659 71,130
Energy............................ 33,562 23,648 31,007
Telecommunications................ 1,013,010 3,026 5,887
Commercial Information
Technology...................... 391,038 116,894 18,524
Other............................. 133,104 114,126 83,082
Products............................. 32,133 55,195 58,632
---------- ---------- ----------
2,047,392 738,270 599,094
Corporate and other assets............. 367,842 274,192 260,196
---------- ---------- ----------
Total assets........................... $2,415,234 $1,012,462 $ 859,290
========== ========== ==========

Because of the nature of the Company's business, sales between segments are
not material. Segment operating results reflect general corporate expense
allocations because all such expenses are allocated to individual cost
objectives by the Company, as required by Government Cost Accounting Standards.
Certain wholly-owned and majority-owned subsidiaries operate in a particular
industry segment, and therefore, all of their assets are identifiable to that
particular industry segment. Identifiable assets of certain other operations

F-14
46
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consist of receivables, inventories and intangible assets. All other assets of
these operations are either corporate in nature, are not identifiable with
particular segments or are not material. Capital expenditures and depreciation
and amortization are not identified as to certain industry segments for similar
reasons.

During 1998, 1997 and 1996, approximately 66%, 79% and 83%, respectively,
of the Company's contract revenues were attributable to prime contracts with the
U.S. Government or to subcontracts with other contractors engaged in work for
the U.S. Government. In 1996, approximately 10% of the Company's consolidated
revenues were derived from one U.S. Government contract in the Health business
area, which was a contract to automate the information systems for the
Department of Defense's medical treatment facilities worldwide. This contract
was substantially completed in 1997. No single contract had revenues greater
than 10% of the Company's consolidated revenues in 1998 and 1997.

Revenues, operating income and identifiable assets from international
subsidiaries were $312,412,000, $14,888,000 and $245,096,000, respectively, in
1998. Such amounts were not material in 1997 and 1996. Revenues, operating
income and identifiable assets from domestic operations were $2,776,939,000,
$150,031,000 and $1,802,296,000 in 1998. Corporate and other assets were
$367,842,000 in 1998.

NOTE D -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:

JANUARY 31
--------------------
1998 1997
-------- --------
(IN THOUSANDS)

Inventories:
Contracts-in-process, less progress payments of $315 at
January 31, 1997........................................ $ 5,095 $ 13,161
Raw materials............................................. 7,376 20,822
-------- --------
$ 12,471 $ 33,983
======== ========
Prepaid expenses and other current assets:
Prepaid expenses.......................................... $ 21,916 $ 10,936
Short-term investments.................................... 40,200
Other..................................................... 13,730 6,456
-------- --------
$ 75,846 $ 17,392
======== ========
Property and equipment at cost:
Computers and other equipment............................. $335,674 $182,160
Office furniture and fixtures............................. 30,911 20,291
Leasehold improvements.................................... 59,234 17,064
-------- --------
425,819 219,515
Less accumulated depreciation and amortization............ 137,537 130,488
-------- --------
$288,282 $ 89,027
======== ========
Land and buildings at cost:
Buildings and improvements................................ $167,437 $ 87,235
Land...................................................... 45,259 22,275
Land held for future use.................................. 702 702
-------- --------
213,398 110,212
Less accumulated depreciation and amortization............ 17,864 13,444
-------- --------
$195,534 $ 96,768
======== ========
Other assets:
Investment in affiliates.................................. $ 28,990 $ 28,979
Related party receivable (Note H)......................... 51,135
Other long-term receivables............................... 31,765
Other..................................................... 9,343 26,904
-------- --------
$121,233 $ 55,883
======== ========

F-15
47
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JANUARY 31
--------------------
1998 1997
-------- --------
(IN THOUSANDS)

Accounts payable and accrued liabilities:
Accounts payable.......................................... $178,315 $112,560
Other accrued liabilities................................. 264,364 94,578
Collections in excess of revenues on uncompleted
contracts............................................... 305,352 66,343
-------- --------
$748,031 $273,481
======== ========
Accrued payroll and employee benefits:
Salaries, bonuses and amounts withheld from employees'
compensation............................................ $154,244 $ 63,018
Accrued vacation.......................................... 82,922 52,138
Accrued contributions to employee benefit plans........... 25,242 16,078
-------- --------
$262,408 $131,234
======== ========
Other long-term liabilities:
Other postretirement benefits............................. $124,423
Accrued pension liability................................. 40,954
Accrued other employee benefits........................... 22,062
Deferred revenue.......................................... 26,897 $ 9,439
Deferred compensation..................................... 23,245 19,664
Other..................................................... 76,096 11
-------- --------
$313,677 $ 29,114
======== ========

NOTE E -- RECEIVABLES:

Receivables consist of the following:

JANUARY 31
--------------------
1998 1997
-------- --------
(IN THOUSANDS)

Receivables, primarily U.S. Government and RBOCs, less
allowance for doubtful accounts of $36,184 and $18,048 at
January 31, 1998 and 1997, respectively:
Billed...................................................... $652,644 $435,864
Unbilled, less progress payments of $17,141 and $17,291 at
January 31, 1998 and 1997, respectively................... 132,349 101,326
Contract retentions......................................... 25,392 25,760
-------- --------
$810,385 $562,950
======== ========

Unbilled receivables at January 31, 1998 and 1997 include $15,247,000 and
$13,976,000, respectively, related to costs incurred on projects for which the
Company has been requested by the customer to begin work under a new contract or
extend work under an existing contract, but for which formal contracts or
contract modifications have not been executed. These amounts have been included
in Technical Services revenues. The balance of unbilled receivables consist of
costs and fees billable on contract completion or other specified events, the
majority of which is expected to be billed and collected within one year.
Contract retentions are billed when the Company has negotiated final indirect
rates with the U.S. Government and, once billed, are subject to audit and
approval by outside third parties. Consequently, the timing of collection of
retention balances is outside the Company's control. Based on the Company's
historical experience, the majority of the retention balance is expected to be
collected beyond one year.

NOTE F -- REVOLVING CREDIT FACILITIES:

In August 1997, the Company entered into two new credit facilities
("Facilities") totaling $900,000,000 with a group of financial institutions
which provide for (i) a five-year reducing revolving credit facility of up to
$700,000,000 and (ii) a 364-day revolving credit facility of up to $200,000,000.
These Facilities were entered

F-16
48
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

into to provide funding for the acquisition of Bellcore and for general
corporate purposes and replaced the $105,000,000 unsecured revolving credit loan
agreements. In January 1998, upon issuance of long-term notes (Note J), the
Company terminated the 364-day revolving credit facility. Borrowings under the
remaining $700,000,000 facility ("Credit Facility") are unsecured and bear
interest, at the Company's option, at various rates based on the base rate, bid
rate or on margins over the CD rate or LIBOR. The Company pays a facility fee on
the total commitment amount. Certain financial covenants required by the Credit
Facility, such as, requiring the Company to maintain certain levels of net worth
and an interest coverage ratio, as well as limitation on indebtedness have been
maintained as of January 31, 1998.

There were no balances outstanding under any credit agreements at January
31, 1998 and 1997. As of January 31, 1998, the entire $700,000,000 was available
under the most restrictive debt covenants of the credit facility. The maximum
amounts outstanding were $320,000,000, $31,000,000 and $43,000,000 in 1998, 1997
and 1996, respectively. The average amount outstanding was $38,228,000,
$2,299,000 and $9,380,000 during 1998, 1997 and 1996, respectively. The weighted
average interest rate in 1998, 1997 and 1996 was 6.0%, 5.9% and 6.4%
respectively, based upon average daily balances.

NOTE G -- EMPLOYEE BENEFIT PLANS:

The Company has one principal Profit Sharing Retirement Plan ("PSRP") in
which eligible employees participate. Participants' interests vest 25% per year
in the third through sixth year of service. Participants also become fully
vested upon reaching age 59 1/2, permanent disability or death. Contributions
charged to income under the PSRP were $18,929,000, $10,167,000 and $23,355,000
for 1998, 1997 and 1996, respectively.

The Company has an Employee Stock Retirement Plan ("ESRP"), formerly known
as the Employee Stock Ownership Plan, in which eligible employees participate.
Cash contributions to the ESRP are based upon amounts determined annually by the
Board of Directors and are allocated to participants' accounts based on their
annual compensation. The Company recognizes compensation expense as the fair
value of the Company common stock or cash in the year of contribution. The
vesting requirements for the ESRP are the same as the PSRP. Shares of Company
common stock distributed from the ESRP bear a limited put option that, if
exercised, would require the Company to repurchase the shares at their then
current fair value. At January 31, 1998, the ESRP held 15,681,000 shares of
Class A Common Stock and 30,000 shares of Class B Common Stock with a combined
fair value of $619,467,000. Contributions charged to income under the Plan were
$22,072,000, $29,492,000 and $10,259,000 for 1998, 1997 and 1996, respectively.

The Company has one principal Cash or Deferred Arrangement (CODA) which
allows eligible participants to defer a portion of their income through
contributions. Such deferrals are fully vested, are not taxable to the
participant until distributed from the CODA upon termination, retirement,
permanent disability or death and may be matched by the Company. The Company's
matching contributions to the CODA of $14,454,000, $9,567,000 and $11,535,000
were charged to income in 1998, 1997 and 1996, respectively. Effective January
1, 1995, the Company's matching contributions to employees hired on or after
such date are subject to the same vesting requirements as the PSRP, while the
Company's matching contributions for employees hired prior to such date remain
fully vested.

In connection with the acquisition of Bellcore, the Company also sponsors
two contributory savings plans which allow eligible Bellcore employees to defer
a portion of their pre-tax income through contributions and contribute a portion
of their income on an after-tax basis. Such deferrals are fully vested, are not
taxable to the participant until distributed upon termination, retirement,
permanent disability or death and may be matched by the Company. The Company's
matching contributions charged to income were $2,800,000 in 1998.

The Company has two principal bonus compensation plans, the Bonus
Compensation Plan and the Success Sharing Plan ("SSP"), which provide for
bonuses to reward outstanding performance. The SSP was assumed in connection
with the acquisition of Bellcore in 1998. Bonuses are paid in the form of cash,
fully

F-17
49
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

vested shares of Class A Common Stock or vesting shares of Class A Common Stock.
Awards of vesting shares of Class A common stock vest at the rate of 20%, 20%,
20% and 40% after one, two, three and four years, respectively. The amounts
charged to income under these plans were $49,587,000, $32,359,000 and
$25,868,000 for 1998, 1997 and 1996, respectively.

The Company has a Stock Compensation Plan and Management Stock Compensation
Plan, together referred to as the "Stock Compensation Plans." The Stock
Compensation Plans provide for awards of share units to eligible employees,
which share units generally correspond to shares of Class A Common Stock which
are held in trust for the benefit of participants. Participants' interests in
these share units vest on a seven year schedule at the rate of one-third at the
end of each of the fifth, sixth and seventh years following the date of the
award. The fair market value of shares awarded under these plans are recorded as
unearned compensation which is included in stockholders' equity. The unearned
amounts are amortized to expense over the vesting period. The amounts charged to
income under these plans were $1,688,000, $1,282,000 and $686,000 for 1998, 1997
and 1996, respectively.

The Company also has an Employee Stock Purchase Plan ("ESPP") which allows
eligible employees to purchase shares of the Company's Class A Common Stock,
with the Company contributing currently 10% of the existing fair market value.
There are no charges to income under this plan. However, the proforma effect on
net income and earnings per share of compensation expense under SFAS No. 123,
"Accounting for Stock-Based Compensation" has been disclosed in Note L.

The Company has two deferred compensation plans. The Keystaff Deferral Plan
is maintained for the benefit of key executives and directors, pursuant to which
eligible participants may elect to defer a portion of their compensation. The
Company makes no contributions to the accounts of participants under this plan
but does credit participant accounts for deferred compensation amounts and
interest earned on such deferred compensation. Interest is accrued based on the
Moody's Seasoned Corporate Bond Rate (7.0% in 1998). Deferred balances will
generally be paid upon the later of the attainment of age 65, ten years of plan
participation or retirement, unless participants obtain approval for an early
pay-out. The Key Executive Stock Deferral Plan is maintained for the benefit of
directors and certain key executives. Eligible participants may elect to defer a
portion of their compensation into a trust established by the Company which
invests in shares of Class A Common Stock. The Company makes no contributions to
the accounts of participants. Deferred balances will generally be paid upon
retirement or termination.

NOTE H -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:

In connection with the acquisition of Bellcore, the Company assumed assets
and liabilities related to two noncontributory defined benefit pensions plans
covering eligible management and support staff employees of Bellcore. The
Company accounts for these benefit plans in accordance with SFAS No. 87,
"Employers' Accounting for Pensions" ("SFAS No. 87"). Benefits are based on a
stated percentage of final average pay formula for the management plan and a
flat-dollar amount per years of service for the support staff plan. All of the
assets of the plans, which are primarily equity and fixed income securities, are
held in a master trust administered by the Company. In general, the Company's
policy is to fund these plans based on legal requirements, tax considerations
and investment opportunities.

F-18
50
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net pension income for the two plans consisted of the following:

YEAR ENDED
JANUARY 31, 1998
-----------------
(IN THOUSANDS)

Service cost................................................ $ 5,183
Interest cost on projected benefit obligation............... 14,753
Return on plan assets....................................... (60,084)
Net amortization and deferral............................... 33,387
Other....................................................... 63
-----------
Net pension income.......................................... $ (6,698)
===========

The following sets forth the plans' funded status and amounts recorded in
the Company's consolidated balance sheet:

JANUARY 31, 1998
-----------------
(IN THOUSANDS)

Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$779,669.................................................. $ 867,512
===========
Projected benefit obligation................................ (1,019,628)
Plan assets at fair value................................... 1,474,418
-----------
Plan assets in excess of projected benefit obligation....... 454,790
Unrecognized net gain....................................... (30,682)
-----------
Prepaid pension assets...................................... $ 424,108
===========

The assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows: 5% graded weighted average annual
rate of increase in compensation levels, 7% discount rate and 9% rate of return
on assets.

In addition to assuming the assets and liabilities of the Bellcore pension
plans, the Company also assumed assets and liabilities for postretirement health
and life insurance benefits for retired U.S. employees and their dependents. The
Company accounts for these benefit plans in accordance with SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
No. 106"). Plan assets are held in two Voluntary Employee Benefit Association
trusts. In general, the Company's policy is to annually contribute to the trusts
an amount determined by management, limited in part by tax limitations.

Net postretirement benefits expense for the plans consisted of the
following:

YEAR ENDED JANUARY 31, 1998
----------------------------------
HEALTH LIFE INSURANCE TOTAL
------ --------------- -------
(IN THOUSANDS)

Future service cost............................... $ 744 $ 175 $ 919
Interest cost..................................... 2,066 499 2,565
Return on plan assets............................. (555) (1,830) (2,385)
Net amortization and deferral..................... 414 1,029 1,443
------ ------- -------
Net postretirement benefits expense............... $2,669 $ (127) $ 2,542
====== ======= =======

F-19
51
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following sets forth the plans' funded status and amounts recorded in
the Company's consolidated balance sheet:

JANUARY 31, 1998
--------------------------------------
HEALTH LIFE INSURANCE TOTAL
--------- -------------- ---------
(IN THOUSANDS)

Actuarial present value of benefit obligations:
Accumulated benefit obligation
Retirees......................................... $ (63,720) $(17,520) $ (81,240)
Other fully eligible participants................ (4,080) (120) (4,200)
Other active participants........................ (74,696) (16,775) (91,471)
--------- -------- ---------
(142,496) (34,415) (176,911)
Plan assets at fair value.......................... 12,489 44,243 56,732
--------- -------- ---------
Plan assets less than accumulated benefit
obligation....................................... (130,007) 9,828 (120,179)
Unrecognized net gain.............................. (1,219) (1,003) (2,222)
--------- -------- ---------
Accrued postretirement benefits.................... $(131,226) $ 8,825 $(122,401)
========= ======== =========

The assumptions used in determining the actuarial present value of
projected benefit obligation were as follows: 5% graded weighted average annual
rate of increase in compensation levels, 7% discount rate and 8.2% long-term
weighted average rate of return on assets. The assumed health care trend rates
used to measure the expected cost of benefits covered by the plan was 8% in
1998. This rate is assumed to decrease 1/2% a year to 5% in 2004 and remain at
that level thereafter. A one-percentage point increase in the assumed health
care trend rates would increase the accumulated postretirement benefit
obligations by $22,100,000 and the total of the service and interest cost
components of net postretirement benefits expense by $500,000.

On January 2, 1997, approximately 1,500 employees transferred from PDVSA to
INTESA. Under Venezuelan law, INTESA assumed the existing employee benefit
plans, including a defined benefit pension plan. Under the terms of the joint
venture agreement, PDVSA agreed to fund the projected benefit obligation of the
pension plan and the accumulated postretirement benefit obligation of the
postretirement benefit plans over 10 years. The obligation of PDVSA to fund
these benefits has been reflected as a related party receivable and included in
other assets in the Company's consolidated balance sheet. The plans are
accounted for in accordance with the requirements of SFAS No. 87 and SFAS No.
106.

Benefits are based upon years of service and compensation during the twelve
months of accredited service earned immediately before retirement. All of the
assets of the pension plan, receivable and cash, are not currently held in a
trust. PDVSA has agreed to fund this obligation by December 31, 2006 either
through direct payments to INTESA or direct contributions to a trust.

Net pension expense consisted of the following:

YEAR ENDED
JANUARY 31,
1998
-----------
(IN
THOUSANDS)

Service cost................................................ $ 3,308
Interest cost on projected benefit obligation............... 12,953
-------
Pension expense............................................. $16,261
=======

F-20
52
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following sets forth the plan's funded status and amounts recorded in
the Company's consolidated balance sheet:

JANUARY 31,
1998
-----------
(IN
THOUSANDS)

Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9,185.................................................... $(23,352)
Projected compensation increases............................ (30,346)
--------
Projected benefit obligation................................ (53,698)
Plan assets at fair value...................................
--------
Projected benefit obligation in excess of plan assets....... (53,698)
Other....................................................... (34)
Unrecognized prior service cost............................. 1,999
Unrecognized transition asset............................... 6,150
--------
Accrued pension liability................................... $(45,583)
========

The assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows: increase in future compensation
levels of 7%, weighted-average discount rate of 10% and rate of return on assets
of 12%.

In addition to the pension benefits described above, certain postretirement
benefits were also transferred to INTESA for health and life insurance benefits
for the PDVSA employees who transferred to INTESA. Eligibility for the plans and
participant cost sharing is dependent upon the participant's age at retirement,
years of service and retirement date. The Company accounts for these benefit
plans in accordance with SFAS No. 106. The accrued postretirement benefits
liability and net postretirement benefits expense were $2,022,000 and $318,000,
respectively, as of and for the year ended January 31, 1998.

NOTE I -- INCOME TAXES:

The provision for income taxes includes the following:

YEAR ENDED JANUARY 31
-------------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)

Current:
Federal........................................... $ 87,755 $ 56,258 $36,281
State............................................. 21,097 13,374 8,693
Foreign........................................... 8,397 767 347
Deferred:
Federal........................................... (35,880) (17,113) (158)
State............................................. (6,641) (3,718) (82)
Foreign........................................... (1,029) (39) (63)
-------- -------- -------
$ 73,699 $ 49,529 $45,018
======== ======== =======

F-21
53
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes. Deferred
tax assets (liabilities) are comprised of the following:

JANUARY 31
---------------------
1998 1997
--------- --------
(IN THOUSANDS)

Income recognition:
Contractually billable method............................. $ 75,023 $ 25,787
Completed contract method................................. 2,118 2,165
Accrued vacation pay........................................ 24,241 18,872
Deferred compensation....................................... 14,743 9,511
Vesting stock bonuses....................................... 11,539 7,782
Accrued liabilities......................................... 7,079 5
State taxes................................................. 8,538
Other....................................................... 4,947 5,433
--------- --------
Total deferred tax assets......................... 148,228 69,555
--------- --------
Employee benefit plan contributions......................... (125,653) (9,581)
Depreciation and amortization............................... (61,942) (2,390)
Foreign Earnings............................................ (7,450) (181)
Other....................................................... (2,757) (2,478)
--------- --------
Total deferred tax liabilities.................... (197,802) (14,630)
--------- --------
Net deferred tax asset (liability).......................... $ (49,574) $ 54,925
========= ========

A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax (35%) to income before income taxes
follows:

YEAR ENDED JANUARY 31
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)

Amount computed at statutory rate..................... $55,472 $39,623 $35,810
State income taxes, net of federal tax benefit........ 9,396 6,276 5,597
Nondeductible meals and entertainment................. 3,143 2,567 2,409
Losses of foreign subsidiaries........................ 3,113 987 305
Revision of prior years' tax estimates................ (589) (1,875) (371)
Other................................................. 3,164 1,951 1,268
------- ------- -------
$73,699 $49,529 $45,018
======= ======= =======

Other assets include deferred income taxes of $17,770,000 at January 31,
1997. Income taxes paid in 1998, 1997 and 1996 amounted to $82,905,000,
$59,196,000 and $32,785,000, respectively.

F-22
54
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE J -- LONG-TERM DEBT:

Long-term debt consists of the following:

JANUARY 31
-------------------
1998 1997
-------- -------
(IN THOUSANDS)

6.75% Notes payable......................................... $ 89,800
Capital lease obligations................................... 55,897 $ 2,516
Mortgages payable collateralized by real property........... 6,830 19,214
Other notes payable......................................... 26,443 12,585
-------- -------
178,970 34,315
Less current portion........................................ 33,012 19,088
-------- -------
$145,958 $15,227
======== =======

In January 1998, the Company issued $100,000,000 of 6.75% notes ("6.75%
Notes") under a shelf registration statement filed with the Securities and
Exchange Commission. The 6.75% Notes are due February 1, 2008 with interest
payable semi-annually beginning August 1, 1998 and were issued with a nominal
discount. The Company used the proceeds to repay certain short-term
indebtedness, including obligations assumed in connection with the acquisition
of Bellcore and for general corporate purposes. The Company amortizes the note
discount, underwriter's fees and commissions and the loss on the forward
treasury lock agreement (Note A) to interest expense which results in an
effective interest rate of 8.3% over the term of the 6.75% Notes. The Company is
subject to certain restrictions such as limitations on liens, on sale and
leaseback transactions and on consolidation, merger, and sale of assets. As of
January 31, 1998, the Company was in compliance with the restrictions.

During 1997, the Company assumed a $6,919,000 mortgage note in connection
with the purchase of land and a building. Terms of the note include quarterly
payments of principal and interest until December 2016. Interest is adjusted
annually and was 6.8% in 1998. Additionally, the Company has various other notes
payable with interest rates from 4.3% to 8.0% that are due over the next eleven
years.

Maturities of long-term debt, excluding capital lease obligations, are as
follows:

YEAR ENDING JANUARY 31 (IN THOUSANDS)
---------------------- --------------

1999........................................................ $ 13,502
2000........................................................ 12,043
2001........................................................ 300
2002........................................................ 324
2003........................................................ 276
2004 and after.............................................. 96,628
--------
$123,073
========

F-23
55
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE K -- EARNINGS PER SHARE:

A summary of the elements included in the computation of basic and diluted
EPS is as follows (in thousands, except per-share amounts):

YEAR ENDED JANUARY 31
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
PER-SHARE PER-SHARE PER-SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- ------ --------- ---------- ------ --------- ---------- ------ ---------

Net income........... $84,794 $63,680 $57,296
Basic EPS............ 51,349 $1.65 49,157 $1.30 48,143 $1.19
===== ===== =====
Dilutive Securities:
Stock options...... 3,412 2,498 2,083
Other stock
awards........... 45 83 59
------ ------ ------
Diluted EPS.......... 54,806 $1.55 51,738 $1.23 50,285 $1.14
====== ===== ====== ===== ====== =====

For 1998, 1997 and 1996, 22,000, 4,000 and 7,000 options outstanding were
not included in the computation of diluted EPS because the exercise price was
greater than the average market price of the common shares and their effect
would be antidilutive.

NOTE L -- COMMON STOCK AND OPTIONS:

The Company has options outstanding under two stock option plans, the 1995
Stock Option Plan ("1995 Plan") and the 1992 Stock Option Plan ("1992 Plan").
Under the 1995 Plan and 1992 Plan, options are granted at prices not less than
the fair market value at the date of grant and for terms not greater than ten
years. Options granted under these two plans generally become exercisable 20%,
20%, 20%, and 40% after one, two, three and four years. No options have been
granted under the 1992 Plan after July 31, 1995, the date the 1992 plan
terminated. The Company makes no charge to income in connection with these
plans.

If the Company had elected to recognize compensation expense based upon the
fair value at the grant dates for stock option awards granted in 1998, 1997 and
1996 and for shares issued under the ESPP in 1998, consistent with the
methodology prescribed by SFAS No. 123, net income in 1998, 1997 and 1996 would
have been reduced by $10,328,000, $4,797,000 and $2,273,000, respectively. Basic
earnings per share would have been reduced by $.20, $.10 and $.05 per share in
1998, 1997 and 1996, respectively, and diluted earnings per share would have
been reduced by $.17, $.08 and $.04 per share in 1998, 1997 and 1996,
respectively. These amounts were determined using weighted-average per share
fair values of options granted in 1998, 1997 and 1996 of $7.88, $5.30 and $4.59,
respectively. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for 1998, 1997 and 1996; no dividend yield, no volatility, risk free
interest rates ranging from 5.3% to 9.3% and expected lives of five years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. The Company meets the definition of a non-public company for the
purposes of calculating fair value and, therefore, assumes no volatility in the
fair value calculation. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation plans.

F-24
56
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of changes in outstanding options under the plans during the
three years ended January 31, 1998, is as follows:

SHARES OF CLASS A
SHARES OF CLASS A COMMON STOCK
COMMON STOCK WEIGHTED-AVERAGE EXERCISABLE UNDER
UNDER OPTIONS EXERCISE PRICE OPTIONS
----------------- ---------------- -----------------
(IN THOUSANDS) (IN THOUSANDS)

January 31, 1995..................... 11,653 $11.86 4,014
Options granted.................... 3,383 $16.33
Options canceled................... (493) $12.62
Options exercised.................. (2,226) $ 9.96
------
January 31, 1996..................... 12,317 $13.39 4,467
Options granted.................... 3,606 $20.27
Options canceled................... (640) $15.16
Options exercised.................. (2,454) $10.76
------
January 31, 1997..................... 12,829 $15.73 4,429
Options granted.................... 4,647 $29.75
Options canceled................... (629) $19.22
Options exercised.................. (2,619) $12.26
------
January 31, 1998..................... 14,228 $20.80 4,380
======

As of January 31, 1998, 17,764,000 shares of Class A Common Stock were
reserved for issuance upon exercise of options which are outstanding or which
may be granted. The Company has agreed to make available for issuance, purchase
or options approximately 441,000 shares of Class A Common Stock to employees,
prospective employees and consultants, generally contingent upon commencement of
employment or the occurrence of certain events. The selling price of shares and
the exercise price of options are fair market value at the date such shares are
purchased or options are granted.

A summary of options outstanding as of January 31, 1998 is as follows:

WEIGHTED
WEIGHTED AVERAGE
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- -------------- ---------------- ----------- ----------------
(OPTIONS OUTSTANDING AND EXERCISABLE, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

$12.01 to $13.12..... 1,359 $12.37 .5 1,359 $12.37
$14.19 to $15.07..... 2,344 $14.38 1.4 1,338 $14.38
$15.72 to $18.27..... 2,794 $16.33 2.4 1,066 $16.34
$19.33 to $22.83..... 3,226 $20.27 3.4 617 $20.29
$25.96 to $39.13..... 4,505 $29.82 4.6
------ -----
14,228 4,380
====== =====

NOTE M -- LEASES:

The Company occupies most of its facilities under operating leases. Most of
the leases require the Company to pay maintenance and operating expenses such as
taxes, insurance and utilities and also contain renewal options extending the
leases from one to twenty years. Certain of the leases contain purchase options
and provisions for periodic rate escalations to reflect cost-of-living
increases. Certain equipment, primarily computer-related, is leased under
short-term or cancelable operating leases. Rental expenses for facilities and
equipment totaled $90,012,000, $68,334,000 and $63,282,000 in 1998, 1997 and
1996, respectively.

F-25
57
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has a seven year operating lease for a general purpose office
building, with an option to purchase the building at the end of the initial
seven year term. If the purchase option is not exercised, the Company may be
required to pay certain supplemental rental payments if proceeds from the sale
of the building to an unrelated buyer are below specified amounts. The maximum
supplemental rental payment which could be required is $28,809,000. On February
2, 1998, the Company entered into an operating lease for land and general
purpose office facilities with an initial term of five and one-half years and an
option for the Company to purchase the property. If the purchase option is not
exercised, the Company may be required to pay certain supplemental rental
payments if proceeds from the sale of the property to an unrelated buyer are
below specified amounts. The maximum supplemental rental payment which could be
required is $43,040,000.

Assets acquired under capital leases and included in property and
equipment, and land and buildings consist of the following:

JANUARY 31
-------------------
1998 1997
-------- -------
(IN THOUSANDS)

Computers and other equipment............................... $ 65,016 $ 2,370
Office furniture and fixtures............................... 777 109
Buildings and improvements.................................. 1,760 1,760
-------- -------
67,553 4,239
Less accumulated amortization............................... (13,384) (2,272)
-------- -------
$ 54,169 $ 1,967
======== =======

Minimum rental commitments, primarily for facilities, under all
non-cancelable operating leases and capital leases in effect at January 31,
1998, as well as the operating lease entered into on February 2, 1998, are
payable as follows (in thousands):

YEAR ENDING JANUARY 31 CAPITAL OPERATING
---------------------- -------- ---------

1999........................................................ $ 28,215 $ 73,025
2000........................................................ 25,506 56,951
2001........................................................ 16,613 43,122
2002........................................................ 813 34,779
2003........................................................ 28,902
2004 and after.............................................. 30,127
-------- --------
Total minimum lease payments................................ 71,147 $266,906
========
Amount representing interest................................ (15,250)
--------
Present value of net minimum capital lease payments......... 55,897
Current portion............................................. (19,510)
--------
Long-term obligations under capital leases at January 31,
1998...................................................... $ 36,387
========

The Company's joint venture, INTESA, had capital lease obligations totaling
$49,951,000, of which $16,432,000 was classified as current portion of long-term
debt as of January 31, 1998. These capital lease obligations of the joint
venture are non-recourse debt to the Company.

NOTE N -- COMMITMENTS AND CONTINGENCIES:

Other commitments at January 31, 1998 include outstanding letters of credit
aggregating $27,930,000, principally related to guarantees on contracts with
commercial and foreign customers, and outstanding surety bonds aggregating
$124,419,000, principally related to performance and payment type bonds.

F-26
58
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE O -- SUPPLEMENTARY INCOME STATEMENT INFORMATION:

Charges to costs and expenses for depreciation and amortization of
buildings, property and equipment and capital leases were $52,021,000,
$31,790,000 and $25,956,000 for 1998, 1997 and 1996, respectively.

The Company expensed $23,202,000, $11,145,000 and $10,258,000 of
independent research and development costs during 1998, 1997 and 1996,
respectively.

Total interest paid in 1998, 1997 and 1996 amounted to $8,786,000,
$3,495,000 and $2,746,000, respectively.

The components of other (income) expense, net, in the accompanying
consolidated statement of income are as follows:

YEAR ENDED JANUARY 31
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)

Interest income.................................... $(12,752) $(1,453) $(1,288)
Loss on treasury lock agreement.................... 9,047
Gain on sale of certain business assets............ (6,341)
Equity in income of unconsolidated affiliates...... (1,326) (2,253) (233)
Other (income) expense, net........................ (4,492) 1,513 1,410
-------- ------- -------
$(15,864) $(2,193) $ (111)
======== ======= =======

F-27