10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

or

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

For the transition period from                      to                     

Commission File Number: 1-9247

Computer Associates International, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-2857434
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)
One Computer Associates Plaza
Islandia, New York	11749
(Address of principal executive offices)	(Zip Code)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No þ.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Title of Class	Shares Outstanding
Common Stock	as of November 4, 2005
par value $0.10 per share	580,850,542

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

	Page
PART I. Financial Information
Review Report of Independent Registered Public Accounting Firm		1
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets — September 30, 2005 and March 31, 2005 (restated)		2
Consolidated Condensed Statements of Operations — Three and Six Months Ended September 30, 2005 and 2004 (restated)		3
Consolidated Condensed Statements of Cash Flows — Six Months Ended September 30, 2005 and 2004 (restated)		4
Notes to the Consolidated Condensed Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quarterly Update		27
Business Unit Structure		27
Performance Indicators		30
Results of Operations		32
Liquidity and Capital Resources		39
Outlook		42
Critical Accounting Policies and Business Practices		42
Risk Factors		44
Item 3. Quantitative and Qualitative Disclosures About Market Risk		45
Item 4. Controls and Procedures		46
PART II. Other Information
Item 1. Legal Proceedings		49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 4. Submission of Matters to a Vote of Security Holders		50
Item 6. Exhibits		51
Signatures		52
EX-10.4: EXECUTIVE DEFERRED COMPENSATION PLAN
EX-15.1: ACCOUNTANTS' ACKNOWLEDGEMENT LETTER
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

PART I. FINANCIAL INFORMATION

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated condensed balance sheet of Computer Associates International, Inc. and subsidiaries as of September 30, 2005, the related consolidated condensed statements of operations for the three-month and six-month periods ended September 30, 2005 and 2004, and the related consolidated condensed statements of cash flows for the six-month periods ended September 30, 2005 and 2004. These consolidated condensed financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Computer Associates International, Inc. and subsidiaries as of March 31, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated June 29, 2005, except as to notes 9 and 12 (b) to the consolidated financial statements, which are as of October 18, 2005, we expressed an unqualified opinion on those consolidated financial statements. As discussed in that report, the consolidated financial statements as of March 31, 2005 and 2004 and for each of the years in the three-year period ended March 31, 2005 have been restated. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of March 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note D to the consolidated condensed financial statements, the Company has restated the consolidated condensed balance sheet at March 31, 2005, the consolidated condensed statements of operations for the three-month and six-month periods ended September 30, 2004 and the consolidated condensed statement of cash flows for the six-month period ended September 30, 2004 to reflect the Company’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” on April 1, 2005 under the modified retrospective application method and to reflect the effects of certain prior period restatements that were previously disclosed in Note 12 of the consolidated financial statements in the Company’s Form 10-K/A for the fiscal year ended March 31, 2005.

	/s/ KPMG LLP
New York, New York
November 8, 2005

1

Item 1. Consolidated Condensed Financial Statements.

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
(in millions)

	September 30,		March 31,
	2005		2005
			(restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,529	$	2,829
Marketable securities		111		296
Trade and installment accounts receivable, net		371		674
Federal and state income taxes receivable		—		55
Deferred income taxes		136		79
Other current assets		89		102
TOTAL CURRENT ASSETS		2,236		4,035
Installment accounts receivable, due after one year, net		549		595
Property and equipment, net		634		622
Purchased software products, net		584		726
Goodwill, net		5,120		4,544
Deferred income taxes		115		105
Other noncurrent assets, net		630		536
TOTAL ASSETS	$	9,868	$	11,163
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and loans payable	$	1	$	826
Government investigation settlement		77		153
Accounts payable		323		177
Salaries, wages, and commissions		234		258
Accrued expenses and other current liabilities		295		323
Deferred subscription revenue (collected) — current		1,109		1,407
Taxes payable, other than income taxes payable		78		119
Federal, state, and foreign income taxes payable		410		342
Deferred income taxes		—		89
TOTAL CURRENT LIABILITIES		2,527		3,694
Long-term debt, net of current portion		1,810		1,810
Deferred income taxes		57		121
Deferred subscription revenue (collected) — noncurrent		297		273
Deferred maintenance revenue		237		270
Other noncurrent liabilities		52		53
TOTAL LIABILITIES		4,980		6,221
Stockholders’ equity		4,888		4,942
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	9,868	$	11,163

See Notes to the Consolidated Condensed Financial Statements.

2

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)

	For the Three						For the Six
	Months Ended						Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
				(restated)						(restated)
REVENUE
Subscription revenue	$	696		$	621		$	1,391		$	1,225
Maintenance		113			108			220			220
Software fees and other		43			56			80			122
Financing fees		13			21			27			45
Professional services		77			59			144			114
TOTAL REVENUE		942			865			1,862			1,726
EXPENSES
Amortization of capitalized software costs		111			111			224			223
Cost of professional services		65			54			125			110
Selling, general, and administrative		382			342			770			653
Product development and enhancements		179			178			350			352
Commissions and royalties		68			69			130			135
Depreciation and amortization of other intangible assets		32			32			62			64
Other expenses, net		10			—			11			3
Restructuring and other		45			28			45			28
Government investigation and shareholder litigation settlement		—			211			—			216
TOTAL EXPENSES BEFORE INTEREST AND TAXES		892			1,025			1,717			1,784
Income (loss) from continuing operations before interest and taxes		50			(160	)		145			(58	)
Interest expense, net		10			24			19			50
Income (loss) from continuing operations before income taxes		40			(184	)		126			(108	)
Income tax benefit		(1	)		(88	)		(9	)		(59	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		41			(96	)		135			(49	)
Adjustment to gain on disposal of discontinued operation, net of income taxes		—			(2	)		—			(2	)
NET INCOME (LOSS)	$	41		$	(98	)	$	135		$	(51	)
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations	$	0.07		$	(0.17	)	$	0.23		$	(0.09	)
Discontinued operation		—			—			—			—
Net income (loss)	$	0.07		$	(0.17	)	$	0.23		$	(0.09	)
Basic weighted average shares used in computation		584			587			585			587
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations	$	0.07		$	(0.17	)	$	0.23		$	(0.09	)
Discontinued operation		—			—			—			—
Net income (loss)	$	0.07		$	(0.17	)	$	0.23		$	(0.09	)
Diluted weighted average shares used in computation		610			587			611			587

See Notes to the Consolidated Condensed Financial Statements.

3

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

	For the Six Months
	Ended September 30,
	2005			2004
				(restated)
OPERATING ACTIVITIES:
Net income (loss)	$	135		$	(51	)
Adjustment to gain on disposal of discontinued operation, net of income taxes		—			2
Income (loss) from continuing operations		135			(49	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operating activities:
Depreciation and amortization		286			287
Provision for deferred income taxes		(241	)		(239	)
Non-cash compensation expense related to stock and pension plans		64			45
Charge for purchased in-process research and development		18			—
Foreign currency transaction (gain) loss		(7	)		1
Government investigation charge		—			218
Restructuring and other		41			28
Changes in other operating assets and liabilities, net of effect of acquisitions:
Decrease in noncurrent installment accounts receivable, net		62			119
Increase (decrease) in deferred subscription revenue (collected) — noncurrent		26			(57	)
Decrease in deferred maintenance revenue		(29	)		(48	)
Decrease in trade and current installment accounts receivable, net		289			226
Decrease in deferred subscription revenue (collected) — current		(263	)		(147	)
Increase in taxes payable		65			72
Increase (decrease) in accounts payable, accrued expenses and other		62			(20	)
Restitution fund payment		(75	)		—
Changes in other operating assets and liabilities, net of effect of acquisitions		(41	)		(12	)
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES		392			424
INVESTING ACTIVITIES:
Acquisitions, primarily goodwill, purchased software, and other intangible assets, net of cash acquired		(626	)		(40	)
Settlements of purchase accounting liabilities		(20	)		(7	)
Purchases of property and equipment, net		(55	)		(21	)
Proceeds from divestiture of assets		—			14
Sales (purchases) of marketable securities, net		262			(84	)
(Decrease) increase in restricted cash		(4	)		1
Capitalized software development costs		(42	)		(31	)
NET CASH USED IN INVESTING ACTIVITIES		(485	)		(168	)

4

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
(in millions)

	For the Six Months
	Ended September 30,
	2005			2004
				(restated)
FINANCING ACTIVITIES:
Dividends paid		(47	)		(23	)
Purchases of treasury stock		(260	)		(11	)
Debt repayments		(911	)		—
Exercise of common stock options and other		79			49
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(1,139	)		15
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH		(1,232	)		271
Effect of exchange rate changes on cash		(68	)		1
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,300	)		272
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		2,829			1,793
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,529		$	2,065

See Notes to the Consolidated Condensed Financial Statements.

5

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited Consolidated Condensed Financial Statements of Computer Associates International, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The Consolidated Condensed Balance Sheet at March 31, 2005, the Consolidated Condensed Statements of Operations for the three- and six-month periods ended September 30, 2004, and the Consolidated Condensed Statements of Cash Flows for the six-month period ended September 30, 2004 included in this Form 10-Q have been restated to reflect the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)), on April 1, 2005 under the modified retrospective application method (refer to Note D, “Accounting For Share-Based Compensation” for additional information) and to reflect the effects of certain prior period restatements that were previously disclosed in Note 12 of the Notes to the Consolidated Financial Statements in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results.

Operating results for the three- and six-months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2006. For further information, refer to the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.

Revenue Reclassification: Certain revenue amounts in the first quarter of fiscal year 2006 have been reclassified to conform to the current quarter’s presentation. These reclassifications did not impact total revenue. The following table details the reclassification:

	For the Three Months
	Ended June 30, 2005
	Previously		As
	Reported		Adjusted
	(in millions)
Subscription revenue	$	684	$	695
Maintenance		114		107
Financing fees		18		14

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

Basis of Revenue Recognition: The Company derives revenue from licensing software products, providing customer technical support (referred to as maintenance) and providing professional services, such as consulting and education. The Company licenses the right to use its software products pursuant to software license agreements. Under the Company’s business model, software license agreements include flexible contractual provisions that, among other things, allow customers to receive unspecified future software products for no additional fee. These agreements combine the right to use the software product with maintenance for the term of the agreement. Under these agreements, the Company recognizes revenue

6

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

ratably over the term of the license agreement beginning upon satisfaction of the four revenue recognition criteria noted in Statement of Position 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants. Since the Company recognizes subscription revenue from software license agreements evenly (or ratably) over the applicable license agreement term, the timing and amount of such revenue recognized during an accounting period is determined by the license agreement duration and value reflected in each software license agreement. For license agreements signed prior to October 2000 (the prior business model), once all four of the revenue recognition criteria were met, software license fees were recognized as revenue up-front, and the maintenance fees were deferred and subsequently recognized as revenue over the term of the license.

Revenue from sales to distributors, resellers, and value-added resellers (VARs) is recognized when those partners sell the software products to their customers. Beginning July 1, 2004, certain sales of products to distributors, resellers, and VARs incorporate the right to receive certain unspecified future software products, and revenue from those contracts is therefore recognized on a ratable basis.

Revenue from professional services arrangements is generally recognized as the services are performed. Revenue from committed professional services arrangements that are sold as part of a software transaction are deferred and recognized on a ratable basis over the life of the related software transaction.

For a more detailed description of the Company’s revenue recognition policy, refer to Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.

Cash Dividends: In August 2005, the Company’s Board of Directors declared a quarterly cash dividend of $0.04 per share. The dividend totaled approximately $23 million and was paid on September 30, 2005 to stockholders of record on September 16, 2005. In May 2005, the Company’s Board of Directors declared a quarterly cash dividend of $0.04 per share. The dividend totaled approximately $24 million and was paid on June 30, 2005 to stockholders of record on June 15, 2005.

In June 2004, the Company’s Board of Directors declared a cash dividend of $0.04 per share. The dividend totaled approximately $23 million and was paid on July 15, 2004 to stockholders of record as of June 30, 2004.

Statements of Cash Flows: For the six-month periods ended September 30, 2005 and 2004, interest payments were $71 million and $59 million, respectively, and income taxes paid were $127 million and $53 million, respectively. The increase in taxes paid was primarily attributable to an Internal Revenue Service (IRS) Revenue Procedure which reduced the amount the Company paid for income taxes in fiscal year 2005. The Revenue Procedure granted taxpayers a twelve month deferral for cash received from customers to the extent such receipts were not recognized in revenue for financial statement purposes.

For the period ended September 30, 2004, the Company reclassified certain short-term auction rate notes from cash and cash equivalents to marketable securities. As a result, the consolidated condensed statement of cash flows for the six month period ended September 30, 2004 has been adjusted to increase cash used in investing activities and to decrease the balance of cash and cash equivalents by approximately $77 million.

7

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

NOTE B — COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes unrealized gains and losses on the Company’s available-for-sale securities, net of related taxes, and foreign currency translation adjustments. The components of comprehensive income (loss) for the three- and six-month periods ended September 30, 2005 and 2004 are as follows:

	For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,
	2005			2004			2005			2004
				(restated)						(restated)
	(in millions)
Net income (loss)	$	41		$	(98	)	$	135		$	(51	)
Unrealized gains (losses) on marketable securities, net of tax		—			1			—			(4	)
Foreign currency translation adjustments		(10	)		5			(53	)		—
Total comprehensive income (loss)	$	31		$	(92	)	$	82		$	(55	)

NOTE C — EARNINGS (LOSS) PER SHARE

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

	For the Three					For the Six
	Months Ended					Months Ended
	September 30,					September 30,
	2005		2004			2005		2004
			(restated)					(restated)
	(in millions, except per share amounts)
Net income (loss)	$	41	$	(98	)	$	135	$	(51	)
Interest expense associated with Convertible Senior Notes, net of tax		1		—	(1)		3		—	(1)
Numerator in calculation of diluted earnings (loss) per share	$	42	$	(98	)	$	138	$	(51	)
Weighted average shares outstanding and common share equivalents
Weighted average common shares outstanding		584		587			585		587
Weighted average Convertible Senior Note shares outstanding		23		—			23		—
Weighted average stock awards outstanding		3		—			3		—
Denominator in calculation of diluted earnings per share		610		587	(2)		611		587	(2)
Diluted earnings (loss) per share	$	0.07	$	(0.17	)	$	0.23	$	(0.09	)

(1)

If for the three- and six- month periods ended September 30, 2004, the common share equivalents for the 5% Convertible Senior Notes (convertible into 27 million shares) issued in March 2002 and the 1.625% Convertible Senior Notes (23 million shares) issued in December 2002 (collectively, the Notes) had been dilutive, interest expense, net of tax, related to the Notes would have been added back to net income in order to calculate diluted earnings per share. The interest expense for the Notes, net of tax, for the three- and six-month periods ended September 30, 2004 totaled approximately $7 million and $13 million, respectively.

(2)

Common share equivalents related to the Notes, stock awards, and shareholder settlement shares are not included in the diluted share computation since their effect would have been antidilutive. If the three- and six-month periods ended September 30, 2004 had resulted in net income and had the common share equivalents for the Notes been dilutive, the number of shares used in the calculation of diluted earnings per share for both the three- and six-month periods ended September 30, 2004 would have been 640 million and 639 million, respectively.

8

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

NOTE D — ACCOUNTING FOR SHARE-BASED COMPENSATION

Effective April 1, 2005, the Company adopted, under the modified retrospective basis, the provisions of SFAS No. 123(R), which establishes accounting for share-based awards exchanged for employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee requisite service period (generally the vesting period of the award). The application of the modified retrospective method of SFAS No. 123(R) provides that the financial statements of prior periods are adjusted to reflect the fair value method of expensing share-based compensation for all awards granted on or after April 1, 1995, and accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been restated to reflect the fair value method of expensing share-based compensation, which was materially consistent with the pro forma disclosures required for those periods by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended.

The Company previously applied the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations for share-based awards granted prior to April 1, 2003 and, for fiscal years 2005 and 2004, applied the fair value recognition provisions of SFAS No. 123 under the prospective transition method, which applied the fair value recognition provisions only to awards granted on or after April 1, 2003.

In accordance with SFAS No. 123(R), the Company is required to base initial compensation cost on the estimated number of awards for which the requisite service is expected to be rendered. Historically, and as permitted under SFAS No. 123, the Company chose to record reductions in compensation expense in the periods the awards were forfeited. The cumulative effect on prior periods of the change to an estimated number of awards for which the requisite service is expected to be rendered generated an approximate $1 million credit to the “Selling, general, and administrative” expense line item on the Consolidated Condensed Statements of Operations during the first quarter of fiscal year 2006. In addition, as a result of the Company’s adoption of SFAS No. 123(R), an additional deferred tax asset of $51 million was recorded at March 31, 2005.

The Company recognized share-based compensation in the following line items on the Consolidated Condensed Statements of Operations for the periods indicated:

	For the Three Months				For the Six Months
	Ended September 30,				Ended September 30,
	2005		2004		2005		2004
			(restated)				(restated)
	(in millions)
Cost of professional services	$	1	$	—	$	2	$	2
Selling, general, and administrative		16		12		35		20
Product development and enhancements		9		8		18		14
Share-based compensation expense before tax		26		20		55		36
Income tax benefit		6		2		13		3
Net compensation expense	$	20	$	18	$	42	$	33

Total unrecognized compensation costs related to non-vested awards, expected to be recognized over a weighted average period of 1.6 years, amounted to $152 million at September 30, 2005.

9

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

The following tables detail the modified retrospective application impact of SFAS No. 123(R) on previously reported results:

	For the Three						For the Six
	Months Ended						Months Ended
	September 30, 2004						September 30, 2004
	Previously						Previously
	Reported(1)			Restated(2)			Reported(1)			Restated(2)
				(in millions)
Loss before income taxes	$	(175	)	$	(184	)	$	(92	)	$	(108	)
Loss from continuing operations		(87	)		(96	)		(33	)		(49	)
Basic loss per share	$	(0.15	)	$	(0.17	)	$	(0.06	)	$	(0.09	)
Diluted loss per share		(0.15	)		(0.17	)		(0.06	)		(0.09	)
Net cash provided by operating activities		152			152			425			424
Net cash (used in) provided by financing activities		(13	)		(13	)		14			15

	March 31, 2005
	Previously
	Reported(1)		Restated(2)
	(in millions)
Deferred income tax liability	$	172	$	121
Total liabilities		6,272		6,221
Additional paid-in capital		3,970		4,191
Retained earnings		2,007		1,837
Stockholders’ equity		4,891		4,942
Total liabilities and stockholders’ equity	$	11,163	$	11,163

(1)	As adjusted for the restatements that were previously disclosed in paragraphs “a” and “b” of Note 12 of the Notes to the Consolidated Financial Statements included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.
(2)	Includes minor corrections made to the Company’s previously reported pro forma SFAS No. 123 disclosures as a result of the Company’s adoption of SFAS No. 123(R).

There were no capitalized share-based compensation costs at September 30, 2005 and 2004.

Share-based incentive awards are provided to employees under the terms of the Company’s plans (the Plans). The Plans are administered by the Compensation and Human Resource Committee of the Board of Directors (the Committee). Awards under the Plans may include at-the-money stock options, premium-priced stock options, restricted stock, restricted stock units, performance share units, stock awards, or any combination thereof. The non-management members of the Company’s Board of Directors also receive deferred stock units under a separate director compensation plan (director compensation plan).

Beginning with awards granted in fiscal year 2006, the Company changed its equity-based compensation strategy to provide the general population of employees with restricted stock, as opposed to stock options, which had been the Company’s previous practice. Also, equity based compensation granted to senior management employees was apportioned between restricted stock and stock options. Additionally, under the Company’s amended long-term incentive plan, which is more fully described in the Company’s proxy statement dated July 26, 2005, senior executives were granted stock options during the first six months of fiscal year 2006 and are eligible to receive restricted stock or restricted stock units and performance shares in the future if certain targets are achieved. Awards associated with the fiscal year 2005 performance cycle were granted in the first quarter of fiscal year 2006, whereas awards associated with the fiscal year 2004 performance cycle were granted in the fourth quarter of fiscal year 2004.

10

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

Restricted Stock Awards (RSAs) are stock awards issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over a two or three year period. The fair value of the awards is determined and fixed based on the Company’s stock price on the grant date.

Restricted Stock Units (RSUs) are stock awards that are issued to employees that entitle the holder to receive shares of common stock as the awards vest, typically over a two or three year period. The fair value of the awards is determined and fixed based on the Company’s stock price on the grant date.

Performance Share Units (PSUs) and RSAs or RSUs granted under the amended long-term incentive plan are awards where the number of shares ultimately received by the employee generally depends on Company performance measured against specified targets and typically are granted after a three-year or one-year period, respectively. The fair value of each award is determined on the date that the performance targets are established based on the fair value of the Company’s stock and assumes that performance targets will be achieved. At the conclusion of the performance period, the number of shares of stock issued will vary based upon the achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized will be based on a comparison of the final performance metrics to the specified targets.

Stock options are awards which allow the employee to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to or greater than the Company’s stock price on the date of grant. Awards granted after fiscal year 2000 generally vest one-third per year, become fully vested two or three years from the grant date and have a contractual term of ten years.

The following table summarizes stock option activity during the first six months of fiscal year 2006:

				Weighted
				Average
	Number			Exercise
	of Shares			Price
	(in millions)
Outstanding at March 31, 2005		33.6		$	28.50
Options granted		2.5			28.65
Options converted — Concord acquisition		1.5			22.51
Options exercised		(2.3	)		19.06
Options expired or terminated		(0.8	)		31.83
Outstanding at June 30, 2005		34.5		$	28.80
Options granted		0.1			27.61
Options converted — Niku acquisition		0.8			17.06
Options exercised		(1.0	)		20.33
Options expired or terminated		(0.7	)		31.39
Outstanding at September 30, 2005		33.7		$	28.71

11

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

     The following table summarizes information about options granted under the Plans as of September 30, 2005:

	Options Outstanding							Options Exercisable
					Weighted							Weighted
					Average	Weighted						Average
Range of			Aggregate		Remaining	Average				Aggregate		Remaining	Weighted
Exercise			Intrinsic		Contractual	Exercise				Intrinsic		Contractual	Average
Prices	Shares		Value		Life	Price		Shares		Value		Life	Exercise Price
					(shares and aggregate intrinsic value in millions)
$1.37 – $20.00		4.2	$	60.7	7.2 years	$	13.56		2.4	$	35.5	7.0 years	$	13.39
$20.01– $30.00		20.6		37.2	5.8 years		26.19		14.8		33.6	4.6 years		25.68
$30.01– $40.00		4.7		0	3.4 years		34.76		3.9		0	2.2 years		35.54
$40.01– $50.00		1.9		0	2.4 years		47.12		1.9		0	2.4 years		47.12
$50.01– $74.69		2.3		0	3.8 years		52.08		2.3		0	3.8 years		52.08
		33.7	$	97.9			28.71		25.3	$	69.1			29.97

The Company estimates the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R), Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 107, and the Company’s prior period pro forma disclosures of net earnings, including share-based compensation (determined under a fair value method as prescribed by SFAS No. 123). Key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate, and the Company’s dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the period ended September 30, 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

For the quarters ended September 30, 2005 and 2004, the Company issued options covering approximately 110,000 shares of common stock, with weighted average fair values of $14.91 and $14.09, respectively. The weighted average fair value at the date of grant for options granted during the six-month periods ended September 30, 2005 and 2004 was $15.05 and $14.78 per share, respectively. The weighted average assumptions used for option grants in the respective periods are listed in the table below.

	For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,
	2005			2004			2005			2004
Dividend yield		0.58	%		0.31	%		0.57	%		0.30	%
Expected volatility factor(1)		0.56			0.67			0.56			0.67
Risk-free interest rate(2)		4.1	%		3.6	%		4.1	%		3.6	%
Expected term(3)		6.0			4.5			6.0			4.5

(1)	Measured using historical daily price changes of the Company’s stock over the respective term of the option and the implied volatility derived from the market prices of the Company’s traded options.
(2)	The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.
(3)	The expected term is the number of years that the Company estimates, based primarily on historical experience, that options will be outstanding prior to exercise. The increase in expected term in fiscal year 2006 as compared with fiscal year 2005 was largely related to a change in the demographics of the recipients of stock options. In fiscal year 2005, stock options were granted to a broad base of employees. In fiscal year 2006, stock options were primarily granted to executive management who historically hold options longer than the broad base of employees.

12

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

The following table summarizes restricted stock activity during the first six months of fiscal year 2006:

				Weighted
				Average
	Number			Grant Date
	of Shares			Fair Value
	(in millions)
Outstanding at March 31, 2005		0.9		$	29.26
Restricted stock granted		3.0			27.77
Restricted stock vested or cancelled		(0.1	)		26.05
Outstanding at June 30, 2005		3.8		$	28.17
Restricted stock vested or cancelled		(0.1	)		26.67
Outstanding at September 30, 2005		3.7		$	28.26

The total cash received from employees as a result of employee stock option exercises for the six-month periods ended September 30, 2005 and September 30, 2004 was approximately $64 million and $37 million, respectively. The Company settles employee stock option exercises with stock held in treasury. The total intrinsic value of options exercised and restricted awards vested during the six-month periods ended September 30, 2005 and September 30, 2004 was $32 million and $21 million, respectively. The tax benefits realized by the Company for the six-month periods ended September 30, 2005 and 2004 were $10 million and $5 million, respectively.

Upon adoption of SFAS No. 123(R), the Company has elected to treat awards with graduated vesting for which the grant-date fair value of an individual award is computed for each vesting tranche as one award, and consequently, the total compensation expense is recognized ratably over the entire vesting period, so long as compensation cost recognized at any date at least equals the portion of the grant-date value of the award that is vested at that date.

The Company maintains a Year 2000 Employee Stock Purchase Plan (the Purchase Plan) for all eligible employees. Consistent with the provisions of SFAS No. 123, the Purchase Plan under SFAS No. 123(R) is considered compensatory. The estimated fair value of the stock purchase rights under the Purchase Plan for the six-month offer periods commencing July 1, 2005 and July 1, 2004 was $5.76 and $6.54, respectively. The fair value is estimated on the first date of the offering period using the Black-Scholes option pricing model. The weighted average assumptions that were used in determining the estimated fair value of stock purchase rights under the Purchase Plan are as follows:

	For the Six Month Offer			For the Six Month Offer
	Period Commencing			Period Commencing
	July 1, 2005			July 1, 2004
Dividend yield		0.59	%		0.29	%
Expected volatility factor		0.20			0.30
Risk-free interest rate		3.4	%		1.6	%
Expected term		0.5			0.5

The Company completed its acquisition of Niku Corporation (Niku) during the quarter ended September 30, 2005. Pursuant to the merger agreement, options to purchase Niku common stock were converted (using a ratio of 0.732) into options to purchase approximately 0.8 million shares of the Company’s stock. The weighted average fair value of the options on the date of acquisition was $15.96.

The Company completed its acquisition of Concord Communications, Inc. (Concord) during the quarter ended June 30, 2005. Pursuant to the merger agreement, options to purchase Concord common stock were converted (using a ratio of 0.626) into options to purchase approximately 1.5 million shares of the Company’s stock. The weighted average fair value of the options on the date of acquisition was $11.38.

13

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

The fair value of each option grant was estimated on the date of acquisition using the Black-Scholes option pricing model with the following assumptions:

	Niku			Concord
Dividend yield		0.58	%		0.59	%
Expected volatility factor		0.45			0.46
Risk-free interest rate		4.0	%		3.6	%
Expected term		3.8			3.2

Refer to Note G, “Acquisitions,” for additional information concerning the Company’s acquisitions of Niku and Concord.

NOTE E – ACCOUNTS RECEIVABLE

Net trade and installment accounts receivable consist of the following:

	September 30,			March 31,
	2005			2005
				(restated)
	(in millions)
Current:
Billed accounts receivable	$	556		$	829
Unbilled amounts due within the next 12 months — Business Model		1,750			1,794
Unbilled amounts due within the next 12 months — prior business model		291			389
Less: Allowance for doubtful accounts		(15	)		(33	)
Net amounts expected to be collected		2,582			2,979
Less: Unearned revenue — current		(2,211	)		(2,305	)
Net trade and installment accounts receivable — current	$	371		$	674
Noncurrent:
Unbilled amounts due beyond the next 12 months — Business Model	$	1,618		$	1,698
Unbilled amounts due beyond the next 12 months — prior business model		647			741
Less: Allowance for doubtful accounts		(26	)		(35	)
Net amounts expected to be collected		2,239			2,404
Less: Unearned revenue — noncurrent		(1,690	)		(1,809	)
Net installment accounts receivable — noncurrent	$	549		$	595

The components of unearned revenue consist of the following:

	September 30,		March 31,
	2005		2005
			(restated)
	(in millions)
Current:
Unamortized discounts	$	53	$	62
Unearned maintenance		28		23
Deferred subscription revenue (uncollected)		1,268		1,030
Noncurrent deferred subscription revenue (uncollected) associated with amounts to be billed within the next 12 months		784		1,133
Unearned professional services		78		57
Total unearned revenue — current	$	2,211	$	2,305
Noncurrent:
Unamortized discounts	$	57	$	79
Unearned maintenance		15		32
Deferred subscription revenue (uncollected)		1,618		1,698
Total unearned revenue — noncurrent	$	1,690	$	1,809

14

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

NOTE F – IDENTIFIED INTANGIBLE ASSETS

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

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

	At September 30, 2005
	Gross		Accumulated		Net
	Assets		Amortization		Assets
			(in millions)
Capitalized software:
Purchased	$	4,683	$	4,099	$	584
Internally developed		529		347		182
Other identified intangible assets subject to amortization		481		238		243
Other identified intangible assets not subject to amortization		26		—		26
Total	$	5,719	$	4,684	$	1,035

	At March 31, 2005
	Gross		Accumulated		Net
	Assets		Amortization		Assets
			(in millions)
Capitalized software:
Purchased	$	4,625	$	3,899	$	726
Internally developed		494		330		164
Other identified intangible assets subject to amortization		415		215		200
Other identified intangible assets not subject to amortization		26		—		26
Total	$	5,560	$	4,444	$	1,116

In connection with the acquisition of Concord in June 2005 and Niku in July 2005, the Company recognized approximately $18 million and $23 million of purchased software costs, respectively, and approximately $22 million and $44 million of Other identified intangible assets subject to amortization, respectively. Refer to Note G, “Acquisitions,” for additional information relating to the Concord and Niku acquisitions. In addition, the Company recorded approximately $17 million of purchase software costs related to other acquisitions during the first six months of fiscal year 2006.

In both the second quarter of fiscal years 2006 and 2005, amortization of capitalized software costs was $111 million. Amortization of other identified intangible assets was $12 million and $10 million, respectively.

For the first six months of fiscal years 2006 and 2005, amortization of capitalized software costs was $224 million and $223 million, respectively, and amortization of other identified intangible assets was $23 million and $20 million, respectively.

Based on the identified intangible assets recorded through September 30, 2005, annual amortization expense is expected to be as follows:

	Year Ended March 31,
	2006		2007		2008		2009		2010		2011
					(in millions)
Capitalized software:
Purchased	$	398	$	287	$	38	$	29	$	18	$	9
Internally developed		41		48		40		32		24		13
Other identified intangible assets subject to amortization		49		35		35		35		35		35
Total	$	488	$	370	$	113	$	96	$	77	$	57

15

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

The carrying value of goodwill was $5.120 billion and $4.544 billion as of September 30, 2005 and March 31, 2005, respectively. During the six-month period ended September 30, 2005, goodwill increased by approximately $345 million and $226 million principally as a result of the Company’s acquisition of Concord and Niku, respectively.

NOTE G – ACQUISITIONS

During the second quarter of fiscal year 2006, the Company acquired the common stock of Niku, including its leading information technology governance (ITG) solution, in a cash transaction of approximately $337 million. In addition, the Company converted options to acquire the common stock of Niku and incurred acquisition costs of approximately $5 million and $3 million, respectively, for an aggregate purchase price of $345 million. Niku was a provider of information technology management and governance (IT-MG) solutions, and the Company plans to integrate Niku’s ITG solutions with the Business Service Optimization (BSO) unit. The acquisition of Niku has been accounted for as a purchase and accordingly, its results of operations have been included in the Consolidated Condensed Financial Statements since the date of its acquisition, July 29, 2005 (the Acquisition Date).

The acquisition cost of Niku has been allocated to assets acquired, liabilities assumed and in-process research and development based on estimated fair values at the date of acquisition as follows:

	(in millions)
Cash	$	44
Marketable securities		19
Other assets acquired		20
Deferred revenue		(4	)
Deferred income taxes, net		(4	)
Other liabilities assumed		(37	)
Purchased software products		23
Customer relationships		42
Trademarks/tradenames		2
Goodwill		226
In-process research and development		14
Purchase price	$	345

Approximately $14 million of the purchase price represents the estimated fair value of projects that, as of the acquisition date, had not reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed and has been included in the “Other expenses, net” line item on the Consolidated Condensed Statements of Operations.

Purchased software products will be amortized over approximately five years, trademarks/tradenames will be amortized over seven years, and customer relationships will be amortized over eight years.

The allocation of the purchase price is based upon estimates which may be revised within one year of the date of acquisition as additional information becomes available. It is anticipated that the final purchase price allocation will not differ materially from the preliminary allocation presented above.

The following unaudited pro forma financial information presents the combined results of operations of the Company and Niku as if the acquisition had occurred at April 1, 2005 and 2004. The historical results of the Company for the three and six months ended September 30, 2005 include the results of Niku from the Acquisition Date. The pro forma results presented below for the three and six months ended September 30, 2005 combine the results of the Company for the three and six months ended September 30, 2005 and the historical results of Niku from April 1, 2005 through the Acquisition Date. The pro forma results for the three and six months ended September 30, 2004 combine the historical results of the Company for the three and six months ended September 30, 2004 with the combined historical results for the three and six months ended September 30, 2004 of Niku. The unaudited pro forma financial

16

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had the acquisition of Niku been completed as of the beginning of the periods presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at the Company’s statutory tax rate.

	For the Three Months					For the Six Months
	Ended September 30,					Ended September 30,
	2005		2004			2005		2004
	(unaudited)
	(in millions)
Revenue	$	952	$	880		$	1,890	$	1,756
Income (loss) from continuing operations		35		(97	)		125		(54	)
Net income (loss)		35		(99	)		125		(56	)
Basic earnings (loss) per share
Income (loss) from continuing operations		0.06		(0.17	)		0.21		(0.10	)
Discontinued operation		—		—			—		—
Net income (loss)		0.06		(0.17	)		0.21		(0.10	)
Diluted earnings (loss) per share
Income (loss) from continuing operations		0.06		(0.17	)		0.21		(0.10	)
Discontinued operation		—		—			—		—
Net income (loss)		0.06		(0.17	)		0.21		(0.10	)

During the first quarter of fiscal year 2006, the Company acquired the common stock of Concord, including its Aprisma Management Technologies subsidiary, in a cash transaction of approximately $337 million. In addition, the Company converted options to acquire the common stock of Concord and incurred acquisition costs of approximately $15 million and $7 million, respectively, for an aggregate purchase price of $359 million. Concord was a provider of network service management software solutions, and the Company plans to make Concord’s network management products available both as independent products and as integrated components of the Company’s Unicenter Enterprise Systems Management suite. The acquisition of Concord has been accounted for as a purchase and, accordingly, its results of operations have been included in the Consolidated Condensed Financial Statements since the date of its acquisition, June 7, 2005.

The acquisition cost of Concord has been allocated to assets acquired, liabilities assumed, and in-process research and development based on estimated fair values at the date of acquisition as follows:

	(in millions)
Cash	$	18
Marketable securities		58
Deferred income taxes, net		2
Other assets acquired		41
Deferred revenue		(19	)
3% convertible notes		(86	)
Other liabilities assumed		(44	)
Purchased software products		18
Customer relationships		19
Trademarks/tradenames		3
Goodwill		345
In-process research and development		4
Purchase price	$	359

17

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

Approximately $4 million of the purchase price represents the estimated fair value of projects that, as of the acquisition date, had not reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed and has been included in the “Other expenses, net” line item on the Consolidated Condensed Statements of Operations.

Purchased software products will be amortized over five years, trademarks/tradenames will be amortized over six years, and customer relationships will be amortized over seven years.

The allocation of the purchase price is based upon estimates which may be revised within one year of the date of acquisition as additional information becomes available. Based upon additional information received during the quarter ended September 30, 2005, net liabilities assumed and goodwill was adjusted upward by approximately $3 million. It is anticipated that the final purchase price allocation will not differ materially from the preliminary allocation presented above.

In connection with the acquisition of Concord, the Company assumed $86 million in 3% convertible senior notes due 2023. In accordance with the notes’ terms, the Company redeemed (for cash) the notes in full in July 2005.

Accrued acquisition-related costs and changes in these accruals, including additions related to the Company’s acquisition of Niku, Concord, and Netegrity, Inc. (Netegrity) during the third quarter of fiscal year 2005, were as follows:

	Duplicate
	Facilities &			Employee
	Other Costs			Costs
	(in millions)
Balance at March 31, 2004	$	58		$	12
Additions		8			3
Settlements		(15	)		(6	)
Adjustments		(10	)		—
Balance at March 31, 2005	$	41		$	9
Additions		14			21
Settlements		(10	)		(11	)
Balance at September 30, 2005	$	45		$	19

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

NOTE H — RESTRUCTURING AND OTHER

Restructuring Plan

In July 2005, the Company announced a restructuring plan to increase efficiency and productivity and to more closely align its investments with strategic growth opportunities. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146), the Company accounted for the individual components of the restructuring plan as follows:

Severance: The plan includes a workforce reduction of approximately five percent or 800 positions worldwide. The termination benefits the Company has offered in connection with this workforce reduction are substantially the same as the benefits the Company has provided historically for non-performance-based

18

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

workforce reductions, and in certain countries have been provided based upon statutory minimum requirements. Accordingly, the employee termination obligations incurred in connection with the restructuring plan did not meet the definition of a “one-time benefit arrangement” under SFAS No. 146 and the Company therefore accounted for such obligations in accordance with SFAS No. 112, “Employers’ Accounting for Post employment Benefits, an Amendment of FASB Statements No. 5 and 43.” The Company incurred approximately $24 million of severance costs in the second quarter of fiscal year 2006. The Company anticipates the severance portion of the restructuring plan will cost approximately $40 million and anticipates that the remaining amount will be incurred by the end of the fiscal year or shortly thereafter.

Facilities Abandonment: The Company recorded the costs associated with lease termination and/or abandonment when the Company ceased to utilize the leased property. Under SFAS No. 146, the liability associated with lease termination and/or abandonment is measured as the present value of the total remaining lease costs and associated operating costs, less probable sublease income. The Company incurred approximately $13 million of facilities abandonment costs in the second quarter of fiscal year 2006. The Company will accrete its obligations related to the facilities abandonment to the then-present value and, accordingly, will recognize accretion expense as a restructuring expense in future periods. The Company anticipates the facilities abandonment portion of the restructuring plan will cost between $20 million and $40 million and anticipates that the remaining amount will be incurred by the end of the fiscal year or shortly thereafter.

Accrued restructuring costs and changes in these accruals during the second quarter of fiscal year 2006 were as follows:

				Facilities
	Severance			Abandonment
	(in millions)
Balance at March 31, 2005	$	—		$	—
Additions		24			13
Payments		(3	)		—
Balance at September 30, 2005	$	21		$	13

The liability balance is included in “Accrued expenses and other current liabilities” on the Consolidated Condensed Balance Sheets.

Other

The Company incurred approximately $5 million associated with the termination of a non-core application development professional services project and $3 million in connection with certain DPA related costs.

NOTE I — INCOME TAXES

In October 2004, the American Jobs Creation Act of 2004 was signed into law. This Act introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria are met. In addition, on December 21, 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within American Jobs Creation Act of 2004.” FSP FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. During fiscal year 2005, the Company recorded an estimate of this tax charge of $55 million based on an estimated repatriation amount of $500 million. The income tax expense for the quarter ended June 30, 2005 includes a benefit of approximately $36 million reflecting the Department of Treasury and Internal Revenue Service (IRS) Notice 2005-38 issued on May 10, 2005, which permitted the utilization of additional foreign tax credits to reduce the estimated taxes associated with repatriating the funds. The cash repatriation is expected to occur on or before March 31, 2006.

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

Additionally, the Company recognized a tax benefit of approximately $16 million in the quarter ended September 30, 2005 resulting primarily from the favorable conclusion of an international tax examination and the reduction of a valuation allowance related to a certain foreign jurisdiction’s net operating loss carry forwards.

The Company also incurred $4 million and $14 million of in-process research and development charges associated with the acquisitions of Concord and Niku in the first and second quarters of fiscal year 2006, respectively, which are non-deductible for income tax purposes.

The Company recognized a tax benefit of approximately $26 million in the quarter ended September 30, 2004 which was attributable to an IRS refund received for additional tax benefits arising from foreign export sales in prior fiscal years.

NOTE J — COMMITMENTS AND CONTINGENCIES

Certain legal proceedings in which we are involved are discussed in Note 7, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements included in our amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005 (the Form 10-K/A), filed with the Securities and Exchange Commission. The following discussion should be read in conjunction with the Form 10-K/A.

Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004

The Company, its former Chairman and CEO Charles B. Wang, its former Chairman and CEO Sanjay Kumar, its former Chief Financial Officer Ira Zar, and its Executive Vice President Russell M. Artzt were defendants in one or more stockholder class action lawsuits, filed July 1998, February 2002, and March 2002, alleging, among other things, that a class consisting of all persons who purchased the Company’s common stock during the period from January 20, 1998 until July 22, 1998 were harmed by misleading statements, misrepresentations, and omissions regarding the Company’s future financial performance. In addition, in May 2003, a class action lawsuit captioned John A. Ambler v. Computer Associates International, Inc., et al. was filed in the United States District Court for the Eastern District of New York (the Federal Court). The complaint in this matter, a purported class action on behalf of the Computer Associates Savings Harvest Plan (the CASH Plan) and the participants in, and beneficiaries of the CASH Plan for a class period running from March 30, 1998, through May 30, 2003, asserted claims of breach of fiduciary duty under ERISA, the federal Employee Retirement Income Security Act. The named defendants were the Company, the Company’s Board of Directors, the CASH Plan, the Administrative Committee of the CASH Plan, and the following current or former employees and/or former directors of the Company: Messrs. Wang; Kumar; Zar; Artzt; Peter A. Schwartz; and Charles P. McWade; and various unidentified alleged fiduciaries of the CASH Plan. The complaint alleged that the defendants breached their fiduciary duties by causing the CASH Plan to invest in Company securities and sought damages in an unspecified amount.

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

On August 25, 2003, the Company announced the settlement of all outstanding litigation related to the above-referenced stockholder and derivative actions as well as the settlement of an additional derivative action filed in the Federal Court in connection with the settlement. As part of the class action settlement, which was

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COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

approved by the Federal Court in December 2003, the Company agreed to issue a total of up to 5.7 million shares of common stock to the shareholders represented in the three class action lawsuits, including payment of attorneys’ fees. The Company has completed the issuance of the settlement shares as well as payment of $3.3 million to the plaintiffs’ attorneys in legal fees and related expenses.

In settling the derivative suit, which settlement was also approved by the Federal Court in December 2003, the Company committed to maintain certain corporate governance practices. Under the settlement, the Company and the individual defendants were released from any potential claim by shareholders relating to accounting-related or other public statements made by the Company or its agents from January 1998 through February 2002 (and from January 1998 through May 2003 in the case of the employee ERISA action), and the individual defendants were released from any potential claim by the Company or its shareholders relating to the same matters.

On October 5, 2004 and December 9, 2004, four purported Company stockholders served motions to vacate the Order of Final Judgment and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of the derivative action. These motions primarily seek to void the releases that were granted to the individual defendants under the settlement. On December 7, 2004, a motion to vacate the Order of Final Judgment and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of the 1998 and 2002 stockholder lawsuits discussed above was filed by Sam Wyly and certain related parties. The motion seeks to reopen the settlement to permit the moving shareholders to pursue individual claims against certain present and former officers of the Company. The motion states that the moving shareholders do not seek to file claims against the Company. These motions (60(b) Motions) have been fully briefed. On June 14, 2005, the Federal Court granted movants’ motion to be allowed to take limited discovery prior to the Federal Court’s ruling on the 60(b) Motions. No hearing date is currently set for the 60(b) Motions.

The Government Investigation

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

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

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

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

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

In April 2004, the Audit and Compliance Committee completed its investigation and determined that the Company should restate certain financial data to properly reflect the timing of the recognition of license revenue for the Company’s fiscal years ended March 31, 2001 and 2000. The Audit and Compliance Committee believes that the Company’s financial reporting related to contracts executed under its current Business Model is unaffected by the improper accounting practices that were in place prior to the adoption of the Business Model in October 2000 and that had resulted in the restatement, and that the historical issues it had identified in the course of its independent investigation concerned the premature recognition of revenue. However, certain of these prior period accounting errors have had an impact on the subsequent financial results of the Company as described in Note 12 to the Consolidated Financial Statements in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005. The Company continues to implement and consider additional remedial actions it deems necessary.

On September 22, 2004, the Company reached agreements with the USAO and the SEC by entering into a Deferred Prosecution Agreement (the DPA) with the USAO and consenting to the entry of a Final Consent Judgment in a parallel proceeding brought by the SEC (the Consent Judgment, and together with the DPA, the Agreements). The Federal Court approved the DPA on September 22, 2004 and entered the Consent Judgment on September 28, 2004. The Agreements resolve the USAO and SEC investigations into certain of the Company’s past accounting practices, including its revenue recognition policies and procedures, and obstruction of their investigations.

Under the DPA, the Company has agreed to establish a $225 million fund for purposes of restitution to current and former stockholders of the Company, with $75 million to be paid within 30 days of the date of approval of the DPA by the Federal Court, $75 million to be paid within one year after the approval date and $75 million to be paid within 18 months after the approval date. The Company made the first $75 million restitution payment into an interest-bearing account under terms approved by the USAO on October 22, 2004. The Company made the second $75 million restitution payment into an interest-bearing account under terms approved by the USAO in September 2005. The Company is required to make a third deposit of $75 million on or about March 16, 2006. Pursuant to the Agreements, the Company proposed and the USAO accepted, on or about November 4, 2004, the appointment of Kenneth R. Feinberg as Fund Administrator. Also, pursuant to the Agreements, Mr. Feinberg submitted to the USAO on or about June 28, 2005, a Plan of Allocation for the Restitution Fund (the Plan). The Plan was approved by the Federal Court on August 18, 2005. The payment of these restitution funds is in addition to the amounts that the Company previously agreed to provide current and former stockholders in settlement of certain private litigation in August 2003 (See “Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004”). This amount was paid by the Company in December 2004 in shares at a total value then of approximately $174 million.

The Company has also agreed, among other things, to take the following actions by December 31, 2005: (1) add a minimum of two new independent directors to its Board of Directors; (2) establish a Compliance Committee of the Board of Directors; (3) implement an enhanced compliance and ethics program, including appointment of a Chief Compliance Officer; (4) reorganize its Finance and Internal Audit Departments; and (5) establish an executive disclosure committee. On December 9, 2004, the Company announced that Patrick J. Gnazzo had been named Senior Vice President, Business Practices, and Chief Compliance Officer, effective January 10, 2005. On February 11, 2005, the Board of Directors elected William McCracken to serve as a new independent director, and also changed the name of the Audit Committee of the Board of Directors to the Audit and Compliance Committee of the Board of Directors and amended the Committee’s

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

charter. On April 11, 2005, the Board of Directors elected Ron Zambonini to serve as a new independent director. Under the Agreements the Company has also agreed to the appointment of an Independent Examiner to examine the Company’s practices for the recognition of software license revenue, its ethics and compliance policies and other matters. The Independent Examiner will also review the Company’s compliance with the Agreements and will report findings and recommendations to the USAO, SEC and Board of Directors within six months after appointment and quarterly thereafter. On March 16, 2005, the Federal Court appointed Lee S. Richards III, Esq. of Richards Spears Kibbe & Orbe LLP, to serve as Independent Examiner. Mr. Richards will serve for a term of 18 months unless his term of appointment is extended under conditions specified in the DPA. On September 15, 2005, Mr. Richards issued his six-month report concerning his recommendations regarding best practices.

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

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

After the Independent Examiner’s term expires, the USAO will seek to dismiss its charges against the Company. However, the Company shall be subject to prosecution at any time if the USAO determines that the Company has deliberately given materially false, incomplete or misleading information pursuant to the DPA, has committed any federal crime after the date of the DPA or has knowingly, intentionally and materially violated any provision of the DPA (including any of those described above). Also, as indicated above, the USAO and SEC may require that the term of the DPA be extended beyond 18 months.

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

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

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COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

On September 23, 2004, the USAO filed a ten-count indictment charging Messrs. Kumar and Richards with conspiracy to commit securities fraud and wire fraud, committing securities fraud, filing false SEC filings, conspiracy to obstruct justice and obstruction of justice. Additionally, Mr. Kumar was charged with one count of making false statements to an agent of the Federal Bureau of Investigation and Mr. Richards was charged with one count of perjury in connection with sworn testimony before the SEC. On or about June 29, 2005, the USAO filed a superseding indictment against Messrs. Kumar and Richards, dropping one count and adding several allegations to certain of the nine remaining counts. The Federal Court has set an April 24, 2006 date for the trial of Messrs. Kumar and Richards.

As required by the Agreements, the Company continues to cooperate with the USAO and SEC in connection with their ongoing investigations of the conduct described in the Agreements and in the superseding indictment of Messrs. Kumar and Richards, including providing documents and other information to the USAO and SEC. The Company cannot predict at this time the outcome of the USAO’s and SEC’s ongoing investigations, including any actions the Company may have to take in response to these investigations.

Derivative Actions Filed in 2004

In June 2004, a purported derivative action was filed in the Federal Court by Ranger Governance Ltd. against certain current or former employees and/or directors of the Company. In July 2004, two additional purported derivative actions were filed in the Federal Court by purported Company stockholders against certain current or former employees and/or directors of the Company. In November 2004, the Federal Court issued an order consolidating these three derivative actions. The plaintiffs filed a consolidated amended complaint (the Consolidated Complaint) on January 7, 2005. The Consolidated Complaint names as defendants Charles B. Wang; Sanjay Kumar; Ira H. Zar; David Kaplan; David Rivard; Lloyd Silverstein; Russell M. Artzt; Alfonse D’Amato; Stephen Richards; Michael A. McElroy; Charles P. McWade; Peter A. Schwartz; Gary Fernandes; Robert E. La Blanc; Lewis S. Ranieri; Jay W. Lorsch; Kenneth Cron; Walter P. Schuetze; Willem de Vogel; Richard Grasso; Roel Pieper; Steven Woghin; KPMG LLP; and Ernst & Young LLP. The Company is named as a nominal defendant. The Consolidated Complaint alleges a claim against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, de Vogel, Grasso, Pieper and Woghin for contribution towards the consideration the Company had previously agreed to provide current and former stockholders in settlement of certain class action litigation commenced against the Company and certain officers and directors in 1998 and 2002 (See “Stockholder Class Action and Derivative Lawsuits Filed Prior to 2004”) as well as all damages suffered by the Company in connection with the USAO and SEC investigations (See “The Government Investigation”). The Consolidated Complaint also alleges a claim seeking unspecified relief against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, de Vogel and Woghin for violations of Section 14(a) of the Exchange Act for alleged false and material misstatements made in the Company’s proxy statements issued in 2002 and 2003. The Consolidated Complaint also alleges breach of fiduciary duty by Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, de Vogel, Grasso, Pieper and Woghin. The Consolidated Complaint also seeks unspecified compensatory, consequential and punitive damages against Messrs. Wang, Kumar, Zar, Kaplan, Rivard, Silverstein, Artzt, D’Amato, Richards, McElroy, McWade, Schwartz, Fernandes, La Blanc, Ranieri, Lorsch, Cron, Schuetze, de Vogel, Grasso, Pieper and Woghin based upon allegations of corporate waste and fraud. The Consolidated Complaint also seeks unspecified damages against Ernst & Young LLP and KPMG LLP, for breach of fiduciary duty and the duty of reasonable care, as well as contribution and indemnity under Section 14(a) of the Exchange Act. The Consolidated Complaint requests restitution and rescission of the compensation earned under the Company’s executive compensation plan by Messrs. Artzt, Kumar, Richards, Zar, Woghin, Kaplan, Rivard, Silverstein, Wang, McElroy, McWade and Schwartz. Additionally, pursuant to Section 304 of the Sarbanes-Oxley Act, the Consolidated Complaint seeks reimbursement of bonus or other incentive-based equity compensation received by defendants Wang, Kumar, Schwartz and Zar, as well as alleged profits realized from their sale of securities issued by the Company during the time periods they served as the Chief Executive Officer (Messrs. Wang

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

and Kumar) and Chief Financial Officer (Mr. Zar) of the Company. Although no relief is sought from the Company, the Consolidated Complaint seeks monetary damages, both compensatory and consequential, from the other defendants, including current or former employees and/or directors of the Company, KPMG LLP and Ernst & Young LLP in an amount totaling not less than $500 million.

The consolidated derivative action has been stayed pending resolution of the 60(b) Motions (See “The Government Investigation”). Also, on February 1, 2005, the Company established a Special Litigation Committee of independent members of its Board of Directors to control and determine the Company’s response to this litigation. The Special Litigation Committee has moved for a stay of the consolidated derivative action until it completes its investigation of the claims alleged in the derivative action. That motion is pending.

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

Texas Litigation

On August 9, 2004, a petition was filed by Sam Wyly and Ranger Governance, Ltd. against the Company in the District Court of Dallas County, Texas, seeking to obtain a declaratory judgment that plaintiffs did not breach two separation agreements they entered into with the Company in 2002 (the 2002 Agreements). Plaintiffs seek to obtain this declaratory judgment in order to file a derivative suit on behalf of the Company (See “Derivative Actions Filed in 2004” above). On September 3, 2004, the Company filed an answer to the petition and on September 10, 2004, the Company filed a notice of removal seeking to remove the action to federal court. On February 18, 2005, Mr. Wyly filed a separate lawsuit in Texas federal court alleging that he is entitled to attorney fees in connection with the original litigation filed in Texas. The two actions have been consolidated. On March 31, 2005, the plaintiffs amended their complaint to allege a claim that they were defrauded into entering the 2002 Agreements and seeking rescission of those agreements and damages. The amended complaint in the Ranger Governance litigation seeks rescission of the 2002 Agreements, unspecified compensatory, consequential and exemplary damages and a declaratory judgment that the 2002 Agreements are null and void and that plaintiffs did not breach the 2002 Agreements. On May 11, 2005, the Company moved to dismiss the Texas litigation. On July 21, 2005, plaintiffs filed a motion for summary judgment. On July 22, 2005, the court dismissed the latter two motions without prejudice to refiling the motions later in the action. On September 1, 2005, the Texas federal court granted the Company’s motion to transfer the action to the Federal Court.

Other Civil Actions

In June 2004, a lawsuit captioned Scienton Technologies, Inc. et al. v. Computer Associates International, Inc., was filed in the Federal Court. The complaint seeks monetary damages in various amounts, some of which are unspecified, but which are alleged to exceed $868 million, based upon claims for, among other things, breaches of contract, misappropriation of trade secrets, and unfair competition. This matter is in the early stages of discovery. Although the ultimate outcome cannot be determined, the Company believes that the claims are unfounded and that the Company has meritorious defenses. In the opinion of management, the resolution of this lawsuit is not likely to result in the payment of any amount approximating the alleged damages and in any event, is not expected to have a material adverse effect on the financial position of the Company.

In September 2004, two complaints to compel production of the Company’s books and records, including files that have been produced by the Company to the USAO and SEC in the course of their joint investigation of the Company’s accounting practices (See “The Government Investigation”) were filed by two purported stockholders of the Company in Delaware Chancery Court pursuant to Section 220 of the Delaware General Corporation Law. The first complaint was filed on September 15, 2004, after the Company denied the

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NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

purported stockholder access to some of the files requested in her initial demand, in particular files that had been produced by the Company to the USAO and SEC during the course of their joint investigation. This complaint concerns the inspection of certain Company documents to determine whether the Company has been involved in obstructing the joint investigation by the USAO and SEC and whether certain Company employees have breached their fiduciary duties to the Company and wasted corporate assets; these individuals include Sanjay Kumar, Charles Wang, Ira H. Zar, Lloyd Silverstein, Steven M. Woghin, Stephen Richards, Russell Artzt, Kenneth Cron, Alfonse D’Amato, Robert La Blanc, Lewis S. Ranieri, Jay Lorsch, Walter Schuetze, Alex Serge Vieux, Gary Fernandes, Willem de Vogel, Shirley Strum Kenny, Richard Grasso and Irving Goldstein. The second complaint, filed on September 21, 2004, concerns the inspection of documents related to Mr. Kumar’s compensation and the independence and ability of the Company’s Board of Directors to sue for return of that compensation. The Company filed answers to these complaints on October 15, 2004.

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

NOTE K — DIVESTITURES

In March 2004, the Company sold its approximate 90% interest in ACCPAC to The Sage Group, plc. The Company’s net proceeds totaled $104 million for all of the outstanding equity interests of ACCPAC. The Company received approximately $90 million of the net proceeds in fiscal year 2004 and the remainder in the first quarter of fiscal year 2005. The sale completes the Company’s multi-year effort to exit the business applications market. In the fourth quarter of fiscal year 2004, the Company recorded a gain on the disposition of ACCPAC of $60 million, net of tax. In the second quarter of fiscal year 2005, the Company recorded an adjustment to the gain on disposal of $2 million, net of tax.

NOTE L — SUBSEQUENT EVENTS

In October 2005, the Company completed the acquisition of iLumin, a privately held provider of enterprise message management and archiving software, in a transaction valued at approximately $47 million.

In October 2005, the Company announced that its Board of Directors authorized the Company to buy back an additional $200 million in Company shares during fiscal year 2006 for an annual total of up to $600 million. During the six-month period ended September 30, 2005, the Company repurchased approximately $260 million in Company stock.

In November 2005, the Company announced that it entered into a partnership with Garnett & Helfrich Capital, a private equity firm, to create an independent corporate entity, Ingres Corporation. The Company divested its Ingres open source database unit into Ingres Corporation, in which Garnett & Helfrich Capital is the majority shareholder.

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Item 2.

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

This Quarterly Report on Form 10-Q (Form 10-Q) contains certain forward-looking information relating to Computer Associates International, Inc. (the “Company,” “Registrant,” “CA,” “We,” “Our,” or “Us”) that is based on the beliefs of and assumptions made by our management as well as information currently available to management. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify forward-looking information. Such information includes, for example, the statements made under the caption “Outlook” in this MD&A, but also appears in other parts of this Form 10-Q. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described below in the section “Risk Factors” and in our amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005 filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Report as anticipated, believed, estimated, or expected. We do not intend to update these forward-looking statements.

QUARTERLY UPDATE

• In July 2005, we completed the acquisition of Niku, a leading provider of information technology management and governance (IT-MG) solutions, in a transaction valued at approximately $345 million. Refer to Note G, “Acquisitions,” of the Notes to the Consolidated Condensed Financial Statements for additional information.

• We recorded charges of approximately $37 million in the second quarter of fiscal year 2006 for severance and other termination benefits and facility closures in connection with our restructuring plan. The restructuring plan is designed to more closely align our investments with strategic growth opportunities and includes a workforce reduction of approximately five percent or 800 positions worldwide. The plan is expected to yield about $75 million in savings on an annualized basis, once the reductions are fully implemented. We anticipate the total restructuring plan will cost between $60 million and $80 million.

• In October 2005, we completed the acquisition of iLumin, a privately held provider of enterprise message management and archiving software, in a transaction valued at approximately $47 million. iLumin’s Assentor product line will be added to our BrightStor solutions.

• In October 2005, we announced that our Board of Directors authorized us to buy back an additional $200 million in Company shares during fiscal year 2006 for an annual total of up to $600 million. During the six-month period ended September 30, 2005, we repurchased approximately $260 million in Company stock.

• In November 2005, we announced that we entered into a partnership with Garnett & Helfrich Capital, a private equity firm, to create an independent corporate entity, Ingres Corporation. We divested our Ingres open source database unit into Ingres Corporation, in which Garnett & Helfrich Capital is the majority shareholder.

BUSINESS UNIT STRUCTURE

We recently aligned the Company’s product development into five business units. The business unit general managers are accountable for the management and performance of their business unit, including product development and innovation, product marketing, quality, staffing, strategic planning and execution, and customer satisfaction. Our business units are Enterprise Systems Management, Security Management, Storage Management, Business Service Optimization, and the CA Products Group. This new structure allows us to become more closely aligned with our customers’ needs, drive more accountability for the performance of each software area, and to be more responsive to the changing dynamics of the management software marketplace. We do not presently maintain profit and loss data on a business unit basis and therefore these are not considered business segments.

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Enterprise Systems Management

Our products for Enterprise Systems Management optimize the availability and capacity of Information Technology (IT) assets and provide a complete, integrated, and open solution for policy-driven, adaptive IT management. The comprehensive set of solutions is built on a framework of common services so that the solutions work together to simplify the complexity present in medium to large enterprises and public sector organizations. Our Enterprise Systems Management solutions help IT organizations:

• Discover business assets and map to operational processes;

• Monitor and optimize health, availability, and performance;

• Automate tedious or error-prone manual procedures;

• Provision assets dynamically according to business priorities or consumption rates; and

• Distill management events and data into business-relevant intelligence.

Our Enterprise Systems Management products manage across the entire IT environment including networks, systems, middleware, servers/operating systems, desktops, databases, and applications. The recent acquisition of Concord significantly strengthened our network management offering and further augments our comprehensive Enterprise Systems Management portfolio.

Security Management

Our solutions for Security Management provide an innovative and comprehensive approach to security. The products protect information assets and resources; provide appropriate system and information access to employees, customers, and partners; and centrally manage security-related administration. We offer Security Management products in the following three categories:

• Identity and Access Management — these products empower IT organizations to manage growing internal and external user populations; secure an increasingly complex array of resources and services; and comply with critical regulatory mandates.

• Threat Management — these products are designed to help customers identify and eliminate internal and external threats such as harmful computer viruses; unauthorized access into computing systems; and security weaknesses associated with operating systems, databases, networks, and passwords.

• Security Information Management — these products help to integrate and prioritize security event information created by CA and third-party security products and enable customers to increase operational efficiencies, help ensure business continuity, adhere to regulatory compliance, and mitigate risks.

Storage Management

Our Storage Management solutions simplify the protection and management of business information, data, and storage resources to support business priorities. Customers use our solutions to proactively optimize storage operations and infrastructure — achieving operational efficiencies, risk mitigation, compliance, business flexibility, and investment protection. We offer Storage Management solutions in the following two categories:

• Data Availability — these solutions help customers mitigate risk and improve business continuity in a cost-effective manner by providing backup/recovery, tape and media management, and high-availability solutions.

• Storage Management — these solutions help customers achieve operational efficiency and gain business flexibility. They enable customers to identify information, data and storage resources;

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monitor the storage environment; classify data, information and resources based on their value to the business; and define and automate storage processes.

Our storage management and data availability solutions support networks, systems, servers, operating systems, desktops, databases, applications, arrays, and tape libraries across mainframe and distributed environments.

Business Service Optimization

Our solutions for Business Service Optimization help organizations manage their IT investments. The products help translate business needs into IT requirements; provide visibility into the services being delivered and the cost of delivering those services; enable more effective management of an IT organization’s people, processes, and assets; and help the business make informed decisions about issues such as investment priorities and outsourcing. We offer Business Service Optimization products in the following three categories:

• Business Process Management — these solutions help companies reduce costs and mitigate risk by achieving process efficiency and agility through automation and the understanding and management of IT and business processes and policies.

• Service Management — these solutions enable IT and business alignment by defining IT service offerings in business terms; provisioning, supporting, and costing these service offerings; improving service levels; and managing change.

• IT Governance — these solutions help assure operational excellence by linking IT decisions with business objectives, providing strong financial control, optimizing IT resources and assets, and controlling software changes.

CA Products

In addition to our leadership offerings in the above areas, we also offer products that address other aspects of the IT environment. This diverse group of solutions includes products that deliver value throughout the IT spectrum, grouped in the following four categories:

• Database Management systems— these solutions enable reliable management of large data and transaction volumes, exploit advances in database technology, and integrate these information stores to distributed and web-based business needs, leveraging database process integrity across the enterprise.

• Application Development systems — these solutions enable customers to build custom business applications in a variety of environments, using technology-neutral business process definitions, and to test and deploy those applications across an evolving IT infrastructure.

• Enterprise Reporting and Information Management systems — these solutions enable customers to efficiently and rapidly report on and process business information.

• Other solutions — these solutions include a wide variety of tools and utilities to optimize the IT environment.

Office of the CTO

The Office of the CTO drives technology strategy across all of the business units and leads research and development for emerging technologies.

• Common Technologies — Our Foundation Services and Management Database (MDB) are technologies common across CA products that enable our products to work together easily and also

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	to work with other vendors’ management software products to deliver an IT environment that is simpler, more secure, less costly to maintain, and more agile.
•	Research — CA Labs drives research in advanced technologies related to management and security by performing research internally and working with major universities and standards bodies. Current areas of focus include securing and managing on-demand computing, grids, virtualized environments, and service-oriented architectures.
•	Emerging Technology Incubator — The Office of the CTO also runs incubator projects to create and bring to market management and security solutions that enable customer adoption of new technologies. Current incubation projects focus on management of wireless networks, smartphones, and radio frequency identification technologies.

PERFORMANCE INDICATORS

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

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

	For the Three Months
	Ended September 30,									Percent
	2005			2004			Change			Change
				(restated)
	(dollars in millions)
Subscription revenue	$	696		$	621		$	75			12	%
Total revenue	$	942		$	865		$	77			9	%
Subscription revenue as a percent of total revenue		74	%		72	%		2			3	%
New deferred subscription revenue (direct)	$	575		$	649		$	(74	)		(11	%)
New deferred subscription revenue (indirect)	$	47		$	41		$	6			15	%
Weighted average license agreement duration in years (direct)		2.92			2.90			0.02			1	%
Cash from operations	$	299		$	152		$	147			97	%
Net income (loss)	$	41		$	(98	)	$	139			142	%

	For the Six Months
	Ended September 30,									Percent
	2005			2004			Change			Change
				(restated)
	(dollars in millions)
Subscription revenue	$	1,391		$	1,225		$	166			14	%
Total revenue	$	1,862		$	1,726		$	136			8	%
Subscription revenue as a percent of total revenue		75	%		71	%		4			6	%
New deferred subscription revenue (direct)	$	911		$	1,179		$	(268	)		(23	%)
New deferred subscription revenue (indirect)	$	90		$	41			NA			NA
Weighted average license agreement duration in years (direct)		2.84			2.83			0.01			—
Cash from operations	$	392		$	424		$	(32	)		(8	%)
Net income (loss)	$	135		$	(51	)	$	186			365	%

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	Sept. 30,		March 31,					Percent
	2005		2005		Change			Change
	(dollars in millions)
Total cash, cash equivalents, and marketable securities	$	1,640	$	3,125	$	(1,485	)		(48	%)
Total debt	$	1,811	$	2,636	$	(825	)		(31	%)

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

Subscription Revenue — Subscription revenue is the ratable revenue recognized in a period from amounts previously recorded as deferred subscription revenue. If the weighted average life of our license agreements remains constant, an increase in deferred subscription revenue will result in an increase in subscription revenue in the future.

New Deferred Subscription Revenue — New deferred subscription revenue represents the total incremental value (contract value) of software licenses sold in a period for which we provide the customer the right to receive unspecified future software products for no additional fee. In the second quarter of fiscal year 2005, we began offering more flexible license terms to our channel partners, necessitating ratable recognition of revenue for the majority of our indirect business. Prior to July 1, 2004, such channel license revenue had been recorded on a sell-through basis (when a distributor, reseller, or VAR sells the software product to their customers) and reported on the “Software fees and other” line item on the Consolidated Condensed Statements of Operations. New deferred subscription revenue excludes the value associated with single-year maintenance-only license agreements, license-only indirect sales, and professional services arrangements and does not include that portion of bundled maintenance or unamortized discounts that are converted into subscription revenue upon renewal of prior business model contracts.

New deferred subscription revenue is what we expect to collect over time from our customers based upon contractual license agreements. This amount is recognized as subscription revenue ratably over the applicable software license term. The license agreements that contribute to new deferred subscription revenue represent binding payment commitments by customers over periods generally up to three years. New deferred subscription revenue is sometimes referred to as “bookings” and is used by management as a gauge of the level of business activity in a particular quarter. Our bookings typically increase in each consecutive fiscal quarter, with the fourth quarter being the strongest. However, since the level of bookings is impacted by the volume and dollar amount of contracts coming up for renewal, the change in bookings, relative to previous periods, does not necessarily correlate to the change in billings or cash receipts, relative to previous periods.

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

Deferred Subscription Revenue — Under our Business Model, the portion of the license revenue that has not yet been recognized creates what we refer to as deferred subscription revenue. Deferred subscription revenue is recognized as revenue evenly on a monthly basis over the duration of the license agreements. When recognized, this revenue is reported on the “Subscription revenue” line item on our Consolidated Condensed Statements of Operations. If a customer pays for software prior to the recognition of revenue, the amount deferred is reported as a liability entitled “Deferred subscription revenue (collected)” on our Consolidated Condensed Balance Sheets. Customers do not always pay for software in equal annual installments over the life of a license agreement. The amount paid under a license agreement for the current year but not yet recognized as revenue is reported as a liability entitled “Deferred subscription revenue (collected) — current”

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on our Consolidated Condensed Balance Sheets. The amount paid under a license agreement for future years which will be recognized as revenue on a monthly basis only in those future years is reported as a liability entitled “Deferred subscription revenue (collected) — noncurrent” on our Consolidated Condensed Balance Sheets. The increase or decrease in current payments attributable to future years is reported as an Operating Activity entitled “Deferred subscription revenue (collected) — noncurrent” on our Consolidated Condensed Statements of Cash Flows.

Weighted Average License Agreement Duration in Years — The weighted average license agreement duration in years reflects the duration of all software licenses executed during a period, weighted to reflect the contract value of each individual software license. We believe license agreement durations averaging approximately three years increase the value customers receive from our software licenses by giving customers the flexibility to vary their software mix as their needs change. We also believe this flexibility improves our customer relationships and holds us more accountable to our customers’ needs.

RESULTS OF OPERATIONS

The following table presents the percentage of total revenue and the percentage of period-over-period dollar change for the revenue line items on our Consolidated Condensed Statements of Operations for the three- and six-month periods ended September 30, 2005 and 2004. These comparisons of past financial results are not necessarily indicative of future results. In addition, after we complete an acquisition, there is usually a period of time required to integrate the acquired business’ products with our other products into our subscription licenses. As these acquired products begin to be sold with our existing products, we cannot separately identify the impact of these acquired business products on total revenue.

	For the Three Months									For the Six Months
	Ended September 30,									Ended September 30,
	Percentage						Percentage			Percentage						Percentage
	of						of			of						of
	Total						Dollar			Total						Dollar
	Revenue						Change			Revenue						Change
							2005/									2005/
	2005			2004			2004			2005			2004			2004
				(restated)									(restated)
Revenue
Subscription revenue		74	%		72	%		12	%		75	%		71	%		14	%
Maintenance		12	%		12	%		5	%		12	%		13	%		—
Software fees and other		5	%		7	%		(23	%)		4	%		7	%		(34	%)
Financing fees		1	%		2	%		(38	%)		1	%		3	%		(40	%)
Professional services		8	%		7	%		31	%		8	%		6	%		26	%
Total revenue		100	%		100	%		9	%		100	%		100	%		8	%

Revenue:

Total Revenue

Total revenue for the quarter ended September 30, 2005 increased $77 million, or 9%, from the prior year comparable quarter to $942 million. This increase was partially a result of the transition to our Business Model, which contributed additional subscription revenue from the prior fiscal year period. The increase in total revenue was also partially attributable to sales of Concord and Niku products, which contributed an aggregate of approximately $32 million of revenue. It is expected that software fees and other revenue and maintenance revenue attributable to acquisitions will decline as these acquired products transition to the Business Model, and the revenue attributable to these acquired products is reported as subscription revenue. In addition, revenue in the second quarter of fiscal year 2006 was positively impacted by approximately $11 million compared with the second quarter of fiscal year 2005 due to fluctuations in foreign currency exchange rates.

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Total revenue for the six months ended September 30, 2005 increased $136 million, or 8%, from the prior year comparable period to $1.862 billion. Similar to the quarter ended September 30, 2005 compared to the quarter ended September 30, 2004, the increase was a result of the transition to our Business Model, which contributed additional subscription revenue from the prior fiscal year period. The increase in total revenue was also partially attributable to sales of Concord and Niku products, which contributed approximately $42 million of revenue. In addition, there was a positive impact to revenue of approximately $31 million due to fluctuations in foreign currency rates. Our revenues were negatively impacted by the fact that since the beginning of the second quarter of fiscal year 2005, revenue from certain contracts in our channel business have been recorded as new deferred subscription revenue, which is ratably recognized into subscription revenue in future periods, compared to prior periods when the majority of such revenue was recognized on an up-front basis.

Subscription Revenue

Subscription revenue represents the portion of revenue ratably recognized on software license agreements entered into under our Business Model. Some of the licenses recorded between October 2000, when our Business Model was implemented, and the second quarter of fiscal year 2006 continued to contribute to subscription revenue on a monthly, ratable basis. As a result, subscription revenue for the quarter ended September 30, 2005 includes the ratable recognition of bookings recorded in the second quarter of fiscal year 2006, as well as bookings recorded between October 2000 and the end of fiscal year 2005, depending on the contract length. This is the primary reason for the increase in subscription revenue in the quarter ended September 30, 2005 versus the comparable prior year quarter.

Subscription revenue for the quarter ended September 30, 2005 increased $75 million, or 12%, from the comparable prior year quarter to $696 million. For the quarters ended September 30, 2005 and 2004, we added new deferred subscription revenue related to our direct business of $575 million and $649 million, respectively. The direct business contributed approximately $658 million to subscription revenue in the second quarter of fiscal year 2006 compared to $618 million in the second quarter of fiscal year 2005. Licenses executed under our Business Model in the quarters ended September 30, 2005 and 2004 had weighted average durations of 2.92 years and 2.90 years, respectively. In addition, we recorded $47 million of new deferred subscription revenue for the quarter ended September 30, 2005 related to our indirect business. The indirect business contributed approximately $38 million to subscription revenue for the quarter ended September 30, 2005. Subscription revenue was further increased as a result of how we record maintenance revenue under our Business Model, as described below.

Subscription revenue for the six months ended September 30, 2005 increased $166 million, or 14%, from the comparable prior year period to $1.391 billion. The increase for the six month period is attributable to the same factors as described above for the second quarter increase. Annualized new deferred subscription revenue (direct) decreased approximately $95 million, or 23%, for the six-month period ended September 30, 2005 over the comparable prior year period to approximately $321 million. The decrease in new deferred subscription revenue was primarily due to changes to our sales force compensation structure for fiscal year 2006, which places a greater emphasis on new product sales, as opposed to renewals of existing contracts.

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

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Maintenance

Maintenance revenue for the quarter ended September 30, 2005 increased $5 million, or 5%, from the comparable prior year quarter to $113 million. The increase is attributable to new maintenance revenue earned from customers who elected optional maintenance at the expiration of their non-term-based license agreements as well as approximately $11 million from maintenance on acquired products. However, the increase was partially reduced by a decrease in maintenance revenue as a result of our transition to, and increased number of license agreements under, our Business Model, where maintenance revenue, bundled along with license revenue, is reported on the “Subscription revenue” line item on the Consolidated Condensed Statements of Operations. The combined maintenance and license revenue on these types of license agreements is recognized on a monthly basis ratably over the term of the agreement. The quantification of the impact that each of these factors had on maintenance revenue is not determinable since maintenance bundled with software licenses under our Business Model is not separately identified. The amount of maintenance revenue reported on this line item from our indirect business for the three months ended September 30, 2005 and 2004 was $13 million and $15 million, respectively.

The amount of maintenance revenue for the six months ended September 30, 2005 was the same as the amount of maintenance revenue for the six months ended September 30, 2004. We recorded approximately $13 million of additional maintenance in the first six months of fiscal year 2006 as compared with the first six months of fiscal year 2005 as a result of acquired products. This increase was offset by how we record maintenance revenue under our Business Model as described above. Maintenance revenue from our indirect business for the six months ended September 30, 2005 decreased $2 million from the comparable prior year period to $26 million.

Software Fees and Other

Software fees and other revenue consist of revenue related to distribution and OEM partners that have been recorded on a sell-through basis, revenue associated with acquisitions and joint ventures, royalty revenues, and other revenue. Revenue related to distribution partners and OEMs is sometimes referred to as “indirect” or “channel” revenue. Software fees and other revenue for the second quarter of fiscal year 2006 decreased $13 million, or 23%, from the comparable prior year quarter to $43 million. In the second quarter of fiscal year 2005, we began offering more flexible license terms to our channel partners, which necessitates the deferral of revenue for the majority of our channel business. The ratable recognition of this deferred revenue is reflected on the “Subscription revenue” line item on the Consolidated Condensed Statements of Operations. The decrease in software fees and other revenue was partially offset by approximately $16 million of license revenue associated with the sale of acquisition related products, sales of which have not yet fully transitioned to our subscription based business model.

Software fees and other for the six months ended September 30, 2005 decreased $42 million, or 34%, from the comparable prior year period to $80 million. The decrease is attributable to the same factors as described above for the second quarter decrease. The decrease in software fees and other revenue was partially offset by approximately $22 million of license revenue associated with the sale of acquisition related products, sales of which have not yet fully transitioned to our subscription based business model.

Financing Fees

Financing fees result from the initial discounting to present value of product sales with extended payment terms under the prior business model, which required up-front recognition of revenue. This discount initially reduced the related installment accounts receivable and was referred to as “Unamortized discounts.” The related unamortized discount is amortized over the life of the applicable license agreement and is reported as financing fees. Under our Business Model, additional unamortized discounts are no longer recorded, since we no longer recognize revenue on an up-front basis for sales of products with extended payment terms. As expected, for the quarter ended September 30, 2005, these fees decreased $8 million, or 38%, from the comparable prior year quarter to $13 million. The decrease is attributable to the discontinuance of license

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agreements offered under the prior business model and is expected to decline to zero over the next several years.

Financing fees for the six months ended September 30, 2005 decreased $18 million, or 40%, from the comparable prior year period to $27 million. The decrease for the six month period is attributable to the same factors as described above for the second quarter decrease.

Professional Services

Professional services revenue for the quarter ended September 30, 2005 increased $18 million, or 31%, from the prior year comparable quarter to $77 million. The increase was attributable to professional service engagements relating to acquired companies of $5 million as well as growth in security software engagements, which utilize Access Control and Identity Management solutions as well as growth in IT Service and Asset Management solutions.

Professional services revenue for the six months ended September 30, 2005 increased $30 million, or 26%, from the comparable prior year period to $144 million. The increase for the six month period is attributable to the same factors as described above for the second quarter increase, including approximately $7 million from engagements relating to acquired companies.

Total Revenue by Geography

The following table presents the amount of revenue earned from the North American and international geographic regions and corresponding percentage changes for the three- and six-month periods ended September 30, 2005 and 2004. These comparisons of financial results are not necessarily indicative of future results.

	Three Months Ended							Six Months Ended
	September 30,							September 30,
	(dollars in millions)
	2005		2004		Change			2005		2004		Change
			(restated)							(restated)
North American	$	520	$	489		6	%	$	1,030	$	967		7	%
International		422		376		12	%		832		759		10	%
	$	942	$	865		9	%	$	1,862	$	1,726		8	%

International revenue increased $46 million, or 12%, and $73 million, or 10%, respectively for the three- and six-month periods ended September 30, 2005 as compared with the prior fiscal year comparable periods. The increase was a result of increased contract bookings in prior periods associated with our European business. The change in international revenue was also partially attributable to a positive impact to revenue from fluctuations in foreign currency exchange rates of approximately $11 million and $31 million for the three- and six-month periods ended September 30, 2005, respectively, compared with the prior fiscal year comparable periods. The increase in revenue from North America was primarily attributable to an increase in contract bookings in prior periods as well as an increase in professional services revenue. The increase was partially offset by decreases in revenue from finance fees and software fees and other revenue.

Price changes did not have a material impact on revenue in the three- and six-month periods ended September 30, 2005 or on the comparable prior fiscal year periods.

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Expenses:

The following table presents expenses as a percentage of total revenue and the percentage of period-over-period dollar change for the line items on our Consolidated Condensed Statements of Operations for the three- and six-month periods ended September 30, 2005. These comparisons of financial results are not necessarily indicative of future results.

	For the Three Months									For the Six Months
	Ended September 30,									Ended September 30,
	Percentage						Percentage			Percentage						Percentage
	of						of			of						of
	Total						Dollar			Total						Dollar
	Revenue						Change			Revenue						Change
							2005/									2005/
	2005			2004			2004			2005			2004			2004
				(restated)									(restated)
Operating expenses
Amortization of capitalized software costs		12	%		13	%		—			12	%		13	%		—
Cost of professional services		7	%		6	%		20	%		7	%		6	%		14	%
Selling, general, and administrative		41	%		40	%		12	%		41	%		38	%		18	%
Product development and enhancements		19	%		21	%		1	%		19	%		20	%		(1	%)
Commission and royalties		7	%		8	%		(1	%)		7	%		8	%		(4	%)
Depreciation and amortization of    other intangible assets		3	%		4	%		—			3	%		4	%		(3	%)
Other expenses, net		1	%		—			—			1	%		—			267	%
Restructuring and other		5	%		3	%		61	%		2	%		2	%		61	%
Shareholder litigation and government investigation settlements		—			24	%		(100	%)		—			13	%		(100	%)
Total expenses before interest and taxes		95	%		118	%		(13	%)		92	%		103	%		(4	%)
Interest expense, net		1	%		3	%		(58	%)		1	%		3	%		(62	%)

Note — Amounts may not add to their respective totals due to rounding.

Amortization of Capitalized Software Costs

Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs are related to new products and significant enhancements to existing software products that have reached the technological feasibility stage.

Amortization of capitalized software costs for the six months ended September 30, 2005 increased $1 million from the comparable prior year period to $224 million.

Cost of Professional Services

Cost of professional services consists primarily of the personnel-related costs associated with providing professional services and training to customers. Cost of professional services for the quarter ended September 30, 2005 increased $11 million, or 20%, from the comparable prior year quarter to $65 million and was primarily attributable to the increase in professional services revenue noted above. The increase in the professional services business margins is largely due to an overall increase in total billable utilization of our professional services employees.

Cost of professional services for the six months ended September 30, 2005 increased $15 million, or 14%, from the comparable prior year period to $125 million and was primarily attributable to the increase in professional services revenue noted above.

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Selling, General and Administrative (SG&A)

SG&A expenses for the quarter ended September 30, 2005 increased $40 million, or 12%, from the comparable prior year quarter to $382 million. The increase was primarily attributable to employee and other costs associated with the Concord and Niku acquisitions of approximately $18 million and increases in Sarbanes-Oxley consulting, legal, and ERP implementation costs of approximately $13 million. SG&A for the quarters ended September 30, 2005 and 2004 also included approximately $16 million and $12 million of share-based compensation expense, respectively, associated with our adoption of the provisions of SFAS No. 123(R) under the modified retrospective application method. Additionally, SG&A for the quarters ended September 30, 2005 and 2004 included a credit to the provision for doubtful accounts of approximately $10 million and $4 million, respectively.

SG&A expenses for the six-month period ended September 30, 2005 increased $117 million, or 18%, compared to the prior fiscal year period to $770 million. The increase was primarily attributable to an increase in Sarbanes-Oxley consulting, legal, and ERP implementation costs of approximately $43 million and an increase in personnel related costs, including an increase of approximately $15 million in share-based compensation expense. SG&A for the six-month period ended September 30, 2005 also included an increase in employee and other costs associated with the Concord and Niku acquisitions of approximately $21 million. Additionally, SG&A for the six-month periods ended September 30, 2005 and 2004 included a credit to the provision for doubtful accounts of approximately $13 million and $5 million, respectively.

Product Development and Enhancements

For the quarter ended September 30, 2005, product development and enhancement expenditures, also referred to as research and development, increased $1 million, or 1%, from the comparable prior year quarter to $179 million. For the quarters ended September 30, 2005 and 2004, product development and enhancement expenditures represented approximately 19% and 21% of total revenue, respectively. Product development and enhancements for the quarters ended September 30, 2005 and 2004 included approximately $9 million and $8 million of share-based compensation expense, respectively. During the second quarter of fiscal year 2006, we continued to focus on and invest in product development and enhancements for emerging technologies such as wireless networks, smartphones, and radio frequency identification technologies, as well as a broadening of our enterprise product offerings.

Product development and enhancement expenditures for the six-month period ended September 30, 2005, decreased $2 million, or 1%, from the comparable prior year period to $350 million. For the six-month periods ended September 30, 2005 and 2004, product development and enhancement expenditures represented approximately 19% and 20% of total revenue, respectively. Product development and enhancements for the six-month periods ended September 30, 2005 and 2004 included approximately $18 million and $14 million of share-based compensation expense, respectively.

Commissions and Royalties

Commissions and royalties for the second quarter of fiscal year 2006 decreased $1 million, or 1%, from the comparable prior year quarter to $68 million. This decrease was primarily due to a new commission structure beginning April 1, 2005, which generally compensates sales employees for increases in billings to customers over the course of the fiscal year, as compared to the previous commission plan which primarily compensated for increases in new deferred subscription revenue. Sales commissions are expensed in the period in which they are earned by employees, which is typically upon the signing of a contract.

Commissions and royalties for the six months ended September 30, 2005 decreased $5 million, or 4%, from the comparable prior year period to $130 million. The decrease for the six-month period was attributable to the same factors as described above for the second quarter decrease.

Depreciation and Amortization of Other Intangible Assets

Depreciation and amortization of other intangible assets expense for the quarter ended September 30, 2005 was equal to depreciation and amortization expense for the quarter ended September 30, 2004.

Depreciation and amortization of other intangible assets for the six months ended September 30, 2005 decreased $2 million, or 3%, from the comparable prior year period to $62 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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Other Expenses, Net

Other expenses, net for the quarter ended September 30, 2005 totaled $10 million. Other expenses, net for the quarter included a $14 million charge for acquired in process research and development associated with the Niku acquisition, partially offset by an approximate $4 million positive impact from foreign currency exchange rate fluctuations.

Other expenses, net for the six months ended September 30, 2005 included charges for acquired in process research and development of $4 million and $14 million associated with the acquisitions of Concord and Niku, respectively, partially offset by an approximate $7 million positive impact from foreign currency exchange rate fluctuations.

Restructuring and Other

We recorded restructuring charges of approximately $37 million in the second quarter of fiscal year 2006 for severance and other termination benefits and facility closures in connection with our restructuring plan. The restructuring plan is designed to more closely align our investments with strategic growth opportunities and includes a workforce reduction of approximately five percent or 800 positions worldwide. The plan is expected to yield about $75 million in savings on an annualized basis, once the reductions are fully implemented. We anticipate the total restructuring plan will cost between $60 million and $80 million. As noted above, approximately $37 million of these costs were incurred in the second quarter of fiscal year 2006, with the remaining amount expected to be incurred by the end of the fiscal year or shortly thereafter. The liability balance is included in “Accrued expenses and other current liabilities” on the Consolidated Condensed Balance Sheets. Additionally, we incurred approximately $5 million associated with the termination of a non-core application development professional services project and $3 million in connection with certain DPA related costs.

Interest Expense, net

Net interest expense for the second quarter of fiscal year 2006 decreased $14 million, or 58%, as compared to the prior fiscal year second quarter to $10 million. The decrease was primarily due to a decrease in average debt outstanding as a result of our $825 million debt repayment in the first quarter of fiscal year 2006.

Net interest expense for the first six months of fiscal year 2006 decreased $31 million, or 62%, as compared to the prior fiscal year comparable period to $19 million. The decrease was due to the decrease in average debt outstanding described above as well as an increase in our average cash balance and an increase in interest rates on the cash balance during the first six months of fiscal year 2006 as compared to the first six months of fiscal year 2005, which resulted in an increase in interest income of approximately $11 million. The change was also due to a decrease in average debt outstanding which resulted in a $7 million decrease in interest expense, and a decrease in the average interest rate on our outstanding debt, which resulted in a $13 million decrease in interest expense.

Income Taxes

In October 2004, the American Jobs Creation Act of 2004 was signed into law. This Act introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria are met. In addition, on December 21, 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within American Jobs Creation Act of 2004.” FSP FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. During fiscal year 2005, we recorded an estimate of this tax charge of $55 million based on an estimated repatriation amount of $500 million. The income tax expense for the quarter ended June 30, 2005 includes a benefit of approximately $36 million reflecting the Department of Treasury and Internal Revenue Service (IRS) Notice 2005-38 issued on May 10, 2005, which permitted the utilization of additional foreign tax credits to reduce the estimated taxes associated with repatriating the funds. The cash repatriation is expected to occur on or before March 31, 2006.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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Additionally, we recognized a tax benefit of approximately $16 million in the quarter ended September 30, 2005 resulting primarily from the favorable conclusion of an international tax examination and the reduction of a valuation allowance related to a certain foreign jurisdiction’s net operating loss carry forwards.

We also incurred $4 million and $14 million of in-process research and development charges associated with the acquisitions of Concord and Niku in the first and second quarters of fiscal year 2006, respectively, which are non-deductible for income tax purposes.

We recognized a tax benefit of approximately $26 million in the quarter ended September 30, 2004 which was attributable to an IRS refund received for additional tax benefits arising from foreign export sales in prior fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable securities totaled $1.640 billion at September 30, 2005, a decrease of $312 million from the June 30, 2005 balance of $1.952 billion. In the second quarter of fiscal year 2006, we paid approximately $302 million for acquisitions compared with $40 million for acquisitions in the second quarter of fiscal year 2005; in the second quarter of fiscal year 2006 there were net sales of $83 million of marketable securities compared with net purchases of $74 million of marketable securities in the prior year second quarter; we paid a quarterly dividend of $23 million in the second quarter of fiscal year 2006 and 2005; we repurchased approximately $176 million in Company stock in connection with our publicly announced corporate buyback program in the second quarter of fiscal year 2006 whereas in the prior fiscal year comparable quarter we did not repurchase any common stock; and we received approximately $29 million in proceeds resulting from the exercise of stock options and other in the second quarter of fiscal year 2006 compared with $9 million in the second quarter of fiscal year 2005.

Cash generated from operating activities for the quarters ended September 30, 2005 and 2004 was $299 million and $152 million, respectively. In the second quarter of fiscal year 2006, cash generated from operating activities was positively impacted by better working capital management, including a decrease of receivables cycles and an increase of payable cycles, and was negatively impacted by our scheduled $75 million payment to the restitution fund in connection with agreements reached with the USAO and the SEC (refer to Note J, “Commitments And Contingencies,” of the Notes to the Consolidated Condensed Financial Statements for additional information).

For the six months ended September 30, 2005, cash, cash equivalents and marketable securities had a net decrease of approximately $1.485 billion from March 31, 2005. In the first six months of fiscal year 2006, we paid approximately $626 million for acquisitions compared with $40 million for acquisitions in the first six months of fiscal year 2005; in the first six months of fiscal year 2006 there were net sales of $262 million of marketable securities compared with net purchases of $84 million of marketable securities in the comparable prior year period; we paid dividends totaling of $47 million in the first six months of fiscal year 2006 compared with dividends of $23 million in the first six months of fiscal year 2005; we repurchased approximately $260 million in Company stock in connection with our publicly announced corporate buyback program in the first six months of fiscal year 2006 whereas we purchased $11 million in Company stock in the prior fiscal year comparable period; and we received approximately $79 million in proceeds resulting from the exercise of stock options and other in the first six months of fiscal year 2006 compared with $49 million in the first six months of fiscal year 2005.

Cash generated from operations for the six month periods ended September 30, 2005 and 2004 was $392 million and $424 million, respectively. Cash generated from operating activities was positively impacted in the first six months of the prior fiscal year by a one-time tax benefit related to an Internal Revenue Service (IRS) Revenue Procedure. The Revenue Procedure reduced the amount paid for income taxes in fiscal year

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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2005 by approximately $109 million. In addition, cash generated from operating activities in the first six months of fiscal year 2006 was negatively impacted by our scheduled $75 million payment to the restitution fund noted above.

Cash and cash equivalents declined by approximately $6 million due to the negative effect that foreign currency exchange rates had on cash during the second quarter of fiscal year 2006. Compared to rates at March 31, 2005, cash and cash equivalents declined by approximately $68 million due to the negative effect that foreign currency exchange rates had on cash during the first six months of fiscal year 2006.

As of September 30, 2005 and March 31, 2005, our debt arrangements consisted of the following:

	September 30, 2005				March 31, 2005
	Maximum		Outstanding		Maximum		Outstanding
	Available		Balance		Available		Balance
Debt Arrangements:			(in millions)
2004 Revolving Credit Facility (expires December 2008)	$	1,000	$	—	$	1,000	$	—
Commercial Paper		400		—		400		—
6.375% Senior Notes due April 2005		—		—		—		825
6.500% Senior Notes due April 2008		—		350		—		350
4.750% Senior Notes due December 2009		—		500		—		500
1.625% Convertible Senior Notes due December 2009		—		460		—		460
5.625% Senior Notes due December 2014		—		500		—		500
International line of credit		5		—		5		—
Other		—		1		—		1
Total			$	1,811			$	2,636

2004 Revolving Credit Facility
In December 2004, we entered into an unsecured, revolving credit facility (the 2004 Revolving Credit Facility). The maximum amount available at any time under the 2004 Revolving Credit Facility is $1 billion. The 2004 Revolving Credit Facility expires December 2008, and no amount was drawn as of September 30, 2005.

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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in the Credit Agreement (other than the representation with respect to material adverse changes, but including the representation regarding the absence of certain material litigation) are correct. We are in compliance with these debt covenants as of September 30, 2005.

Commercial Paper
As of September 30, 2005, there were no borrowings outstanding under our $400 million commercial paper (CP) program. We expect any future outstanding borrowings under the CP program to be supported by cash and marketable securities on hand and undrawn amounts available under the 2004 Revolving Credit Facility.

Fiscal Year 1999 Senior Notes
In fiscal year 1999, the Company issued $1.750 billion of unsecured Senior Notes in a transaction pursuant to Rule 144A under the Securities Act of 1933 (Rule 144A). Amounts borrowed, rates, and maturities for each issue were $575 million at 6.25% due April 15, 2003, $825 million at 6.375% due April 15, 2005, and $350 million at 6.5% due April 15, 2008. As of March 31, 2005, $825 million and $350 million of the 6.375% and 6.5% Senior Notes, respectively, remained outstanding. In April 2005, the Company repaid the $825 million remaining balance of the 6.375% Senior Notes from available cash balances.

Fiscal Year 2005 Senior Notes
In November 2004, the Company issued an aggregate of $1 billion of unsecured Senior Notes (2005 Senior Notes) in a transaction pursuant to Rule 144A. The Company issued $500 million of 4.75%, 5-year notes due December 2009 and $500 million of 5.625%, 10-year notes due December 2014. The Company has the option to redeem the 2005 Senior Notes at any time, at redemption prices equal to the greater of (i) 100% of the aggregate principal amount of the notes of such series being redeemed and (ii) the present value of the principal and interest payable over the life of the 2005 Senior Notes, discounted at a rate equal to 15 basis points and 20 basis points for the 5-year notes and 10-year notes, respectively, over a comparable U.S. Treasury bond yield. The maturity of the 2005 Senior Notes may be accelerated by the holders upon certain events of default, including failure to make payments when due and failure to comply with covenants in the 2005 Senior Notes. The 5-year notes were issued at a price equal to 99.861% of the principal amount and the 10-year notes at a price equal to 99.505% of the principal amount for resale under Rule 144A and Regulation S. The Company also agreed for the benefit of the holders to register the 2005 Senior Notes under the Securities Act of 1933 so that the 2005 Senior Notes may be sold in the public market. Because the Company did not meet certain deadlines for effectiveness of the registration statement, the interest rate on the 2005 Senior Notes increased by 25 basis points as of September 27, 2005 and will increase by an additional 25 basis points as of December 26, 2005, unless the delay is cured prior to that date. After the delay is cured, such additional interest on the 2005 Senior Notes will no longer be payable. The Company used the net proceeds from this issuance to repay debt as described above.

1.625% Convertible Senior Notes
In fiscal year 2003, we issued $460 million of unsecured 1.625% Convertible Senior Notes (1.625% Notes), due December 15, 2009, in a transaction pursuant to Rule 144A. The 1.625% Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness. Concurrent with the issuance of the 1.625% Notes, we entered into call spread repurchase option transactions to partially mitigate potential dilution from conversion of the 1.625% Notes. For further information, refer to Note 6 of the Consolidated Financial Statements in our amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.

3% Concord Convertible Notes
In connection with our acquisition of Concord in June 2005, we assumed $86 million in 3% convertible senior notes due 2023. In accordance with the notes’ terms, we redeemed (for cash) the notes in full in July 2005.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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International Line of Credit
An unsecured and uncommitted multi-currency line of credit is available to meet short-term working capital needs for subsidiaries operating outside the United States. As of September 30, 2005, this line totaled $5 million, none of which was drawn, and approximately $3 million has been pledged in support of a bank guarantee.

Other Matters

At September 30, 2005, we had $1.811 billion in debt and $1.640 billion in cash and marketable securities. Our net debt position was, therefore, approximately $171 million.

Our senior unsecured notes are rated Ba1 and BBB- by Moody’s Investors Services and Fitch Ratings, respectively, and are on stable outlook. Our senior unsecured notes are rated BBB- by Standard & Poor’s and the outlook is negative. Our CP program is rated A-3, Not-Prime, and F-3 by Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, respectively. Peak borrowings under all debt facilities during the second quarter of fiscal year 2006 totaled approximately $1.9 billion, with an annualized weighted average interest rate of 5%.

Capital resource requirements as of September 30, 2005 consisted of lease obligations for office space, equipment, mortgage or loan obligations, and amounts due as a result of product and company acquisitions. During the first six months of fiscal year 2006 we entered into capital commitments for which payments totaling approximately $36 million will be made through June 2007.

It is expected that existing cash, cash equivalents, marketable securities, the availability of borrowings under existing and renewable credit lines, and cash expected to be provided from operations will be sufficient to meet ongoing cash requirements. We expect our long-standing history of providing extended payment terms to our customers to continue.

OUTLOOK

This outlook for the remainder of fiscal year 2006 contains certain forward looking statements and information relating to us that are based on the beliefs and assumptions made by management, as well as information currently available to management. Should business conditions change or should our assumptions prove incorrect, actual results may vary materially from those described below. We do not intend to update these forward looking statements.

This outlook is also premised on the assumption that there will be limited-to-modest improvements in the current economic and IT environments. We also believe that customers will continue to be cautious with their technology purchases.

Our outlook for the third quarter of fiscal year 2006 is to generate revenue in the range of $950 million to $980 million and earnings per share of $0.10. Our outlook for the full fiscal year 2006 is to generate revenue in the range of $3.80 billion to $3.85 billion and earnings per share in the range of $0.41 to $0.43. The above stated earnings per share amounts are based on generally accepted accounting principles and do not correspond to non-GAAP “operating” based earnings measures often used by securities analysts.

CRITICAL ACCOUNTING POLICIES AND BUSINESS PRACTICES

A detailed discussion of our critical accounting policies and the use of estimates in applying those policies is included in our amended Annual Report on Form 10-K/A for the year ended March 31, 2005. In many cases, a high degree of judgment is required, either in the application and interpretation of accounting literature or in the development of estimates that impact our financial statements. These estimates may change in the future if underlying assumptions or factors change. The following is a summary of the critical accounting policies for which estimates were updated as of September 30, 2005.

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

Accounts Receivable

The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts receivable on the balance sheet. In developing the estimate for the allowance for doubtful accounts, we rely on several factors, including:

• Historical information, such as general collection history of multiyear software agreements;

• Current customer information/events, such as extended delinquency, requests for restructuring, and filing for bankruptcy;

• Results of analyzing historical and current data; and

• The overall economic environment.

The allowance has two components: (a) specifically identified receivables that are reviewed for impairment when, based on current information, we do not expect to collect the full amount due from the customer; and (b) an allowance for losses inherent in the remaining receivable portfolio based on the analysis of the specifically reviewed receivables.

We expect the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the prior business model are billed and collected. Under our Business Model, amounts due from customers are offset by deferred subscription revenue (unearned revenue) related to these amounts, resulting in little or no carrying value on the balance sheet. Therefore, a smaller allowance for doubtful accounts is required.

Sales Commissions

Each quarter, we accrue sales commissions based on, among other things, estimates of how our sales personnel will perform against specified annual sales quotas. These estimates involve assumptions regarding the Company’s projected new product sales and billings. All of these assumptions reflect our best estimates, but these items involve uncertainties, and as a result, if other assumptions had been used in the current period, sales commission compensation expense could have been impacted.

Deferred Tax Assets

As of September 30, 2005, our deferred tax assets, net of a valuation allowance, totaled $546 million. The value of these deferred tax assets is predicated on the assumption that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that we consider in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Future results may vary from these estimates. Due to the uncertainties related to these matters, the valuation allowance is based on information available at the time. As additional information becomes available, we reassess the potential realization of these deferred tax assets and may revise our estimates of the valuation allowance.

Goodwill, Capitalized Software Products, and Other Intangible Assets

SFAS No. 142 requires an impairment-only approach to accounting for goodwill. Absent any prior indicators of impairment, we perform an annual impairment analysis during the fourth quarter of our fiscal year. No indicators of impairment were identified during the first six months of fiscal year 2006.

The carrying value of capitalized software products, both purchased software and internally developed software, and other intangible assets, is reviewed on a regular basis for the existence of internal and external facts or circumstances that may suggest impairment. Such facts and circumstances considered include an assessment of the net realizable value for capitalized software products and the future recoverability of cost for other intangible assets as of the balance sheet date. No indicators of impairment were identified during the first six months of fiscal year 2006.

Product Development and Enhancements

We account for product development and enhancements in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86 specifies that

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that reflect our best estimates. If other assumptions had been used in the current period to estimate technological feasibility, the reported product development and enhancement expense could have been impacted.

Accounting for Share-Based Compensation

As described in Note D, “Accounting for Share-Based Compensation,” of the Notes to the Consolidated Condensed Financial Statements, we have used the Black-Scholes option-pricing model to determine the estimated fair value of each share-based award. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period to estimate fair value, share-based compensation expense could have been materially impacted.

Legal Contingencies

We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether the amount of loss is reasonably estimable. Due to the uncertainties related to these matters, accruals are based on information available at the time. As additional information becomes available, we reassess the potential liability related to our pending litigation and claims and may revise our estimates. Such revisions could have a material impact on our results of operations and financial condition. Refer to Note J, “Commitments and Contingencies,” of the Notes to the Consolidated Condensed Financial Statements for a description of our material legal proceedings.

RISK FACTORS

Current and potential stockholders should consider carefully the risk factors described in more detail in our amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005 and as set forth below. Any of these factors, or others, many of which are beyond our control, could negatively affect our revenue, profitability and cash flow.

• We have entered into a Deferred Prosecution Agreement (DPA) with the U.S. Attorney’s Office for the Eastern District of New York (USAO) and a Final Consent Judgment with the SEC and if we violate either agreement we may be subject to, among other things, criminal prosecution or civil penalties which could adversely affect our credit ratings, stock price, ability to attract or retain employees and, therefore, our sales, revenue and client base.

• Changes to compensation of our sales organization; we update our compensation plan for the sales organization annually. These plans are intended to align with our Business Model objectives of providing customer flexibility and satisfaction. The compensation plan may encourage behavior not anticipated or intended as it is implemented, which could adversely affect our business, financial condition, operating results, and cash flow.

• If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed.

• We may encounter difficulties in successfully integrating companies and products that we have acquired or may acquire into our existing business and, therefore, such failed integration may adversely affect our infrastructure, market presence, results of operations and stock price.

• We are subject to intense competition in product and service offerings and pricing, and we expect to face increased competition in the future, which could hinder our ability to attract and retain employees

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
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and diminish demand for our products and, therefore, reduce our sales, revenue and market presence.

• Certain software is licensed from third parties and thus may not be available to us in the future, which has the potential to delay product development and production and, therefore, decrease revenues and profits.

• Certain software we use is from open source code sources which under certain circumstances may lead to increased costs and, therefore, decreased cash flow.

• If our products do not remain compatible with ever-changing operating environments we could lose customers and the demand for our products and services could decrease, which would negatively impact sales and revenue.

• Failure to timely adapt to technological change could adversely affect our revenues and earnings.

• Discovery of errors in our software could adversely affect our revenues and earnings and subject us to product liability claims, which may be costly and time consuming.

• Our credit ratings have been downgraded and could be downgraded further which would require us to pay additional interest under our credit agreement and could adversely affect our ability to borrow.

• We have a significant amount of debt and failure to generate sufficient cash as our debt becomes due or to renew credit lines prior to their expiration may adversely affect our business, financial condition, operating results, and cash flow.

• Failure to protect our intellectual property rights would weaken our competitive position.

• We may become dependent upon large transactions and the failure to close such transactions could adversely affect our business, financial condition, operating results, and cash flow.

• Our customers’ data centers and IT environments may be subject to hacking or other breaches harming the market perception of the effectiveness of our products.

• Our software products, data centers and IT environments may be subject to hacking or other breaches harming the market perception of the effectiveness of our products.

• General economic conditions may lead our customers to delay or forgo technology upgrades which could adversely affect our business, financial condition, operating results, and cash flow.

• The use of third-party microcode could negatively impact our product development.

• The software business is marked by easy entry and large, entrenched businesses which may lead to increased competition and which could have a material adverse effect on our business, financial condition, operating results, and cash flow.

• We may lose access to third-party operating systems which would adversely affect future product development.

• The markets for some or all of our key product areas may not grow.

• Third parties could claim that our products infringe their intellectual property rights which could result in significant litigation expense or settlement with unfavorable terms that could adversely affect our business, financial condition, operating results, and cash flow.

• Fluctuations in foreign currencies could result in transaction losses.

• Our stock price is subject to significant fluctuations.

• Taxation of extraterritorial income could adversely affect our results.

• Other potential tax liabilities may adversely affect our results.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, debt, and installment accounts receivable. We have a prescribed methodology whereby we invest our excess cash in debt instruments of government agencies and high-quality corporate issuers (Standard & Poor’s single “A” rating and higher). To mitigate risk, many of the securities have a maturity date within one year, and

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holdings of any one issuer, excluding the U.S. government, do not exceed 10% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated.

As of September 30, 2005, our outstanding debt approximated $1.811 billion, approximately all of which was in fixed rate obligations. If market rates were to decline, we could be required to make payments on the fixed rate debt that would exceed those based on current market rates. Each 25 basis point decrease in interest rates would have an associated annual opportunity cost of approximately $5 million. Each 25 basis point increase or decrease in interest rates would have no material annual effect on variable rate debt interest based on the balances of such debt as of September 30, 2005.

We do not utilize derivative financial instruments to mitigate the above interest rate risks.

We offer financing arrangements with installment payment terms in connection with our software license agreements. The aggregate amounts due from customers include an imputed interest element, which can vary with the interest rate environment. Each 25 basis point increase in interest rates would have an associated annual opportunity cost of approximately $11 million.

Foreign Currency Exchange Risk

We conduct business on a worldwide basis through subsidiaries in 45 countries and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities. In October 2005, the Board of Directors adopted a Foreign Exchange and Risk Management Policy to govern our approach to foreign currency exposure management and authorized us to enter into derivative transactions and other instruments in order to mitigate the risks associated with foreign currency exposures.

Equity Price Risk

As of September 30, 2005, we have minimal investments in marketable equity securities of publicly traded companies. These investments were considered available-for-sale with any unrealized gains or temporary losses deferred as a component of stockholders’ equity. It is not customary for us to make investments in equity securities as part of our investment strategy.

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Audit and Compliance Committee and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q.

As previously disclosed in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, the Company determined that, as of the end of the 2005 fiscal year, there were material weaknesses affecting its internal control over financial reporting and, as a result of those weaknesses, the Company’s disclosure controls and procedures were not effective. As described below, the Company is in the process of remediating those material weaknesses. Consequently, based on the evaluation described above, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that, as of the end of the second quarter of fiscal year 2006, the Company’s disclosure controls and procedures were not effective.

46

Changes in internal control over financial reporting

During the first quarter of fiscal year 2006, the Company was engaged in an ongoing review of its internal control over financial reporting for fiscal 2005 as described below. Based on that review management believes that, during the second quarter of fiscal year 2006 there were changes in the Company’s internal control over financial reporting, as described below, that have materially affected, or are reasonably likely to materially affect, those controls.

Changes under the DPA. As previously reported, and as described more fully in Note 7, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, in September 2004 the Company reached agreements with the USAO and SEC by entering into the DPA with the USAO and by consenting to the SEC’s filing of a Final Consent Judgment (Consent Judgment) in the United States District Court for the Eastern District of New York. The DPA requires the Company to, among other things, undertake certain reforms that will affect its internal control over financial reporting. These include implementing a worldwide financial and enterprise resource planning (ERP) information technology system to improve internal controls, reorganizing and enhancing the Company’s Finance and Internal Audit Departments, and establishing new records management policies and procedures.

The Company believes that these and other reforms, such as procedures to assure proper recognition of revenue, should enhance its internal control over financial reporting. For more information regarding the DPA, refer to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2004 and the exhibits thereto, including the DPA. For more information regarding the Company’s compliance with the DPA and the Consent Judgment, refer to the information under the heading “Status of the Company’s Compliance with the Deferred Prosecution Agreement and Final Consent Judgment” in the Company’s definitive proxy materials filed on July 26, 2005.

Changes to remediate material weaknesses. As previously reported in its amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, the Company determined that, as of the end of fiscal 2005, there were material weaknesses in its internal control over financial reporting relating to (1) improper accounting of credits attributable to software contracts executed under the Company’s prior business model, which resulted in financial statement restatements of prior years, (2) an ineffective control environment associated with its Europe, Middle East and Africa (EMEA) region businesses and (3) improper accounting for recording revenue from renewals of certain prior business model license agreements.

As reported in the amended Annual Report for fiscal 2005, the Company began to make a number of changes in its internal controls to remediate these material weaknesses. Many of these changes were made during the first quarter of fiscal 2006 and continued through the second quarter of fiscal 2006. The remediation effort is not yet completed, and it is the Company’s intention that the material weaknesses be fully remediated by the end of fiscal 2006.

Management is committed to the rigorous enforcement of an effective control environment.

Specific remediation actions taken by management regarding the material weakness in internal control over financial reporting related to improper accounting of credits attributable to software contracts executed under the Company’s prior business model include the following:

• During the quarter ended June 30, 2005, the Company began maintaining a separate schedule of credits granted under software contracts executed under the Company’s prior business model;

• During the quarter ended June 30, 2005, the financial reporting department began quarterly reviews of utilized credits to determine the proper accounting for utilized credits that were originally granted under software contracts executed under the Company’s prior business model; and

• Beginning with the quarter ended June 30, 2005, management and internal audit began periodic testing of the completeness and accuracy of the credit schedule prepared by the sales accounting department and of all accounting entries related to the utilization of any such credits by the Company’s customers.

47

Specific remediation actions taken by management regarding the material weakness relating to the control environment associated with the EMEA region include the following:

• Disciplinary proceedings against members of management and other employees in the EMEA region, leading to their resignation or termination subsequent to March 31, 2005;

• The appointment of a new head of Global Procurement in April 2005;

• The appointment of a new Head of Procurement for the EMEA region in June 2005;

• The appointment of a new General Manager for the EMEA region in June 2005;

• The appointment of a new Head of Facilities for the EMEA region in July 2005;

• The hiring of additional finance personnel, including a new controller for the UK in August 2005;

• The initiation of changes to the roles and responsibilities, as well as reporting lines, of executives in charge of the EMEA region for more effective segregation of duties during the first and second quarters of fiscal year 2006; and

• Ongoing communications from senior management and provision of training to employees regarding the importance of the control environment, financial integrity, and the Company’s code of ethics.

Specific remediation actions taken by management regarding the material weakness relating to the accounting error in recording revenue from renewals of certain prior business model license agreements include the following:

• In October 2005, the Company restated its financial statements for fiscal years 2005 through 2002, and for the interim periods in fiscal years 2005 and 2004, to reflect the correction of the accounting errors; and

• The Company will monitor the renewal of prior business model license agreements to ensure that any remaining deferred maintenance and unamortized discounts are recognized ratably over the life of the new subscription based license agreement.

The remediation of the material weaknesses described above is ongoing. Management believes that its efforts, when fully implemented, will be effective in remediating such material weaknesses. In addition, management will continue to monitor the results of the remediation activities and test the new controls as part of its review of its internal control over financial reporting for fiscal 2006.

Other changes in internal controls. During the six months ended September 30, 2005, the Company has made improvements to its internal controls in light of findings made during the examination of its internal control function in connection with its amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005. These improvements include more comprehensive documentation of key control activities in the areas of income tax, financial reporting, software development, direct sales, indirect sales, accounts payable and professional services. The process is ongoing and the Company will continue to address items that require remediation, work to improve internal controls, and educate and train employees on controls and procedures in order to establish and maintain effective internal control over financial reporting.

48

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Refer to Note J, “Commitments and Contingencies,” of the Consolidated Condensed Financial Statements for information regarding legal proceedings.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth, for the months indicated, our purchases of common stock in the second quarter of fiscal year 2006:

							Maximum
					Total Number		Number
					of Shares		of Shares that
					Purchased as		May Yet Be
	Total Number		Average		Part of Publicly		Purchased Under
	of Shares		Price Paid		Announced Plans		the Plans
Period	Purchased		per Share		or Programs		or Programs
	(in thousands, except average price paid per share)
July 1, 2005 — July 31, 2005		1,443	$	28.30		1,443		9,181
August 1, 2005 — August 31, 2005		1,296		27.07		1,296		7,885
September 1, 2005 — September 30, 2005		3,587		27.61		3,587		4,298
Total		6,326				6,326

Our corporate buyback program was originally announced in August 1990 and was subsequently amended by the Board of Directors from time to time to increase the number of shares of our common stock we have been authorized to purchase (the 1990 Program). In April 2005 the Board of Directors authorized the repurchase of up to $400 million in shares of Company stock during fiscal year 2006 (the Fiscal 2006 Program), subject to the share limits imposed under the 1990 Program. Repurchases during the fiscal 2006 period ended October 24, 2005 were made under the Fiscal 2006 Program. Effective October 25, 2005, the Board of Directors amended the Fiscal 2006 Program to authorize us to expend up to $600 million to repurchase shares of Company stock during fiscal year 2006, representing a $200 million increase in the amount previously authorized for expenditure in fiscal year 2006 for stock repurchases (the amended Fiscal 2006 Program). As part of the approval of the amended Fiscal 2006 Program, the Board of Directors terminated the 1990 Program and resolved that the Board of Directors would henceforth express its authorization to management to repurchase shares of Company stock only in dollars, and not in shares, as had been the case under the 1990 Program. Immediately prior to its termination on October 25, 2005, approximately three million shares remained available for repurchase under the 1990 Program.

49

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

(a)	The annual meeting of stockholders was held on August 24, 2005.
(b)	The stockholders elected the following directors for the ensuing year:

Kenneth D. Cron	Lewis S. Ranieri
Alfonse M. D’Amato	Walter P. Schuetze
Gary J. Fernandes	John A. Swainson
Robert E. La Blanc	Laura S. Unger
Jay W. Lorsch	Ron Zambonini
William E. McCracken

(c) (i) A separate tabulation with respect to each nominee is as follows:

	Affirmative		Authority
Name	Votes		Withheld
Kenneth D. Cron		509,754,749		12,110,501
Alfonse M. D’Amato		478,648,083		43,217,167
Gary J. Fernandes		508,488,255		13,376,995
Robert E. La Blanc		507,902,584		13,962,666
Jay W. Lorsch		507,573,225		14,292,025
William E. McCracken		510,335,991		11,529,259
Lewis S. Ranieri		506,417,577		15,447,673
Walter P. Schuetze		509,808,089		12,057,161
John A. Swainson		511,654,649		10,210,601
Laura S. Unger		511,372,102		10,493,148
Ron Zambonini		511,661,626		10,203,624

(c) (ii) The stockholders voted to ratify the Company’s Change in Control Severance Policy as follows:

Affirmative Votes	448,076,162
Negative Votes	16,783,711
Abstentions	3,044,212
Broker non-votes	53,961,165

(c)  (iii) The stockholders voted to ratify the appointment of KPMG LLP as the Company’s independent registered public accountants for the    fiscal year ending March 31, 2006 as follows:

Affirmative Votes	486,504,629
Negative Votes	32,618,258
Abstentions	2,742,363

(c) (iv) The stockholders approved the amendments to the Company’s 2002 Incentive Plan as follows:

Affirmative Votes	445,319,810
Negative Votes	19,390,341
Abstentions	3,193,935
Broker non-votes	53,961,164

50

Item 6. EXHIBITS

Regulation S-K
Exhibit Number
2.1	Announcement of Restructuring Plan.	Previously filed as Item 2.05 and Exhibit 99.2 to the Company’s Current Report on Form 8-K dated July 22, 2005 and incorporated herein by reference.
10.1*	Program whereby certain designated employees, including the Company’s named executive officers, are provided with certain covered medical services, effective August 1, 2005.	Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 1, 2005 and incorporated herein by reference.
10.2*	Computer Associates International, Inc. Change in Control Severance Policy.	Previously filed as Exhibit E to the Company’s Proxy Statement dated July 26, 2005 and incorporated herein by reference.
10.3*	Computer Associates International, Inc. 2002 Incentive Plan, effective April 1, 2002 (Amended and Restated Effective as of March 31, 2003), as amended May 20, 2005.	Previously filed as Exhibit F to the Company’s Proxy Statement dated July 26, 2005 and incorporated herein by reference.
10.4*	Computer Associates International, Inc. Executive Deferred Compensation Plan, effective September 1, 2005.	Filed herewith.
10.5*	Form of Deferral Election.	Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 24, 2005 and incorporated herein by reference.
10.6*	Amendment, dated August 24, 2005, to Employment Agreement, dated April 11, 2004, between Computer Associates International, Inc. and John A. Swainson.	Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated August 24, 2005 and incorporated herein by reference.
10.7*	Modified compensation arrangements for the non-employee directors of the Company, effective August 24, 2005.	Previously filed as Item 1.01 of the Company’s Current Report on Form 8-K dated August 24, 2005 and incorporated herein by reference.
10.8*	Amendment to the Company’s 2003 Compensation Plan for Non-Employee Directors, dated August 24, 2005.	Previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated August 24, 2005 and incorporated herein by reference.
15.1	Accountants’ acknowledgement letter.	Filed herewith.
31.1	Certification of the CEO pursuant to §302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
31.2	Certification of the CFO pursuant to §302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
32	Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

* Management contract or compensatory plan or arrangement.

51

SIGNATURES

Pursuant to the requirements 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.

	COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: November 9, 2005		By:	/s/ ROBERT W. DAVIS
			Robert W. Davis
			Executive Vice President and
			Chief Financial Officer and
			Principal Accounting Officer

52

EX-10.4

Exhibit 10.4

ADOPTION AGREEMENT

1.01 PREAMBLE

By the execution of this Adoption Agreement the Plan Sponsor hereby (complete a. or b.)
a.	þ	adopts a new plan as of September 1, 2005 [month, day, year]
b.	o	amends and restates its existing plan as of                                          [month, day, year] which is the Amendment Restatement Date.
		Original Effective Date:                                          [month, day, year]
		Pre-409A Grandfathering: r Yes r No (If yes, complete Appendix B, “Summary of Grandfathered Provisions”)

1.02 PLAN

Plan Name: Computer Associates International, Inc. Executive Deferred Compensation Plan

Plan Year: April 1 — March 31

1.03 PLAN SPONSOR

Name:	Computer Associates International, Inc.
Address:	One Computer Associates Plaza, Islandia, NY 11749
Phone # :	631-342-6000
EIN:	13 2847434
Fiscal Yr:	March 31 — April 1
Form of Entity:	Corporation

If Plan Sponsor is a Corporation is stock publicly traded?

þ Yes r No

1.04 EMPLOYER

The following entities have been authorized by the Plan Sponsor to participate in and have adopted the Plan:

Entity	Publicly Traded Corporation
	Yes	No
CA Think	r	þ
Computer Associates Inc.	r	þ
	r	r
	r	r
	r	r
	r	r

- 1 -

1.05 ADMINISTRATOR

The Employer has designated the following to be responsible for the Administration of the Plan:

VP, Compensation, Benefits & HRIS (Lisa Chekimoglou)

Note: The Administrator is the person or persons designated by the Employer to be responsible for the administration of the Plan. This is not Fidelity Investments Institutional Operations Company, Inc. nor any other Fidelity affiliate.

- 2 -

2.01 PARTICIPATION

a.	þ	Employees
	i.	þ	Eligible Employees are selected by the Employer as identified in Appendix C which may be periodically updated by the Employer.
	ii.	o	Eligible Employees are those employees of the Employer who satisfy the following criteria:
b.	r	Directors
	i.	o	All Directors are eligible to participate.
	ii.	o	Only Directors selected by the Employer and identified in Appendix C are eligible to participate.

- 3 -

3.01 COMPENSATION

	For purposes of determining Participant contributions under Article 4 and Employer contributions under Article 5, Compensation shall be defined in the following manner [complete a. or b. and c., if applicable]:
	a.	þ
			Compensation, for purposes of the April 1, 2005-March 31, 2006 deferral period, shall mean only an employee’s Annual Performance Bonus (paid in cash) for fiscal 2006, under the Plan Sponsor’s 2002 Incentive Plan, as amended.
	b.	r	Compensation as defined in                                                                                                                          [insert name of qualified plan] without regard to the limitation captured in Section 401(a)(17) of the Code for such Plan Year:
	c.	r	Director Compensation shall have the meaning specified in Section 2.9 except that:
	d.	r	Compensation shall, for all Plan purposes, be limited to $                                        .
3.02 BONUSES
	Compensation, as defined in Section 3.01 of the Adoption Agreement, includes the following type of bonuses:

	Will be treated as Performance
Type	Based Compensation
	Yes	No
Annual Performance Bonus for fiscal 2006 under the Plan Sponsor’s 2002 Incentive Plan, as amended	þ	r
	r	r

- 4 -

	Will be treated as Performance
Type	Based Compensation
	Yes	No
	r	r
	r	r
	r	r

- 5 -

4.01 PARTICIPANT CONTRIBUTIONS

a.	Amount of Deferrals
	A Participant may elect within the period specified in Section 4.01b of the Adoption Agreement to defer the following amounts of Compensation (select i. and ii. or iii.):

i. Compensation Other than Bonuses (for each type of remuneration listed, complete “dollar amount” or “percentage amount,” but not both))

	Dollar Amount		% Amount
Type of Remuneration	Min	Max	Min	Max	Increment
a.
b.
c.

Note: The increment is required to determine the permissible deferral amounts. For example, a minimum of 0% and maximum of 20% with a 5% increment would allow an individual to defer 0%, 5%, 10%, 15% or 20%.

ii. Bonuses (choose one)

	Dollar Amount		% Amount
Type of Bonus	Min	Min	Min			Max			Increment
a. Annual
Performance Bonus				1	%		90	%
b.
c.

iii. Compensation (do not complete if you completed i. and ii.)

Dollar Amount		% Amount
Min	Max	Min	Max	Increment

iv. Director Compensation

	Dollar Amount		% Amount
Type of Remuneration	Min	Max	Min	Max	Increment
Annual Retainer
Meeting Fees
Other:
Other:

- 6 -

b. Election Period

i.	Performance Based Compensation
	A special election period

a.     þ     Does          b.     r     Does Not

apply to each eligible type of performance based compensation referenced in Section 3.02 of the Adoption Agreement.

The special election period, if applicable, will be determined by the Employer.

ii.	Newly Eligible Participants
	An employee who is classified or designated as an Eligible Employee during a Plan Year

a.     þ     May          b.     r     May Not

elect to defer Compensation otherwise payable during the remainder of the Plan Year by completing a deferral agreement within the 30 day period beginning on the date he is eligible to participate in the Plan.

- 7 -

5.01 EMPLOYER CONTRIBUTIONS

a.	Matching Contributions
	i.	Amount
		For each Plan Year, the Employer shall make a Matching Contribution on behalf of each Participant who defers Compensation for the Plan Year and satisfies the requirements of Section 5.01(a)(ii) of the Adoption Agreement equal to (Complete one):
		(A)	r                                          [insert percentage] of the Compensation the Participant has elected to defer for the Plan Year
		(B)	r An amount determined by the Employer in its sole discretion
		(C)	r Matching Contributions for each Participant shall be limited to $                     and/or                     % of Compensation.

(D) r Other:

ii.	Eligibility for Matching Contribution
	A Participant who defers Compensation for the Plan Year shall receive an allocation of Matching Contributions determined in accordance with Section 5.01(a)(i) provided he satisfies the following requirements (complete the ones that are applicable):
	(A)	r	Is employed on the last day of the Plan Year
	(B)	r	Completes                      [insert number] of hours of service during the Plan Year
	(C)	r	Is selected by the Employer in its sole discretion to receive an allocation of Matching Contributions
	(D)	r	No requirements
	(E)	r	Other

- 8 -

	iii.	Time of Allocation
		Matching Contributions, if made, shall be treated as allocated [select one]:
		(A)	r	As of the last day of the Plan Year
		(B)	r	At such times as the Employer shall determine in it sole discretion
		(C)	r	At the time the Compensation on account of which the Matching Contribution is being made would otherwise have been paid to the Participant
		(D)	r	Other:
b.	Other Contributions
	i.	Amount
		The Employer shall make a contribution on behalf of each Participant who satisfies the requirements of Section 5.01(b)(ii) equal to [check one]:
		(A)	r	An amount equal to ___[insert number] % of the Participant’s Compensation
		(B)	r	An amount determined by the Employer in its sole discretion
		(C)	r	Contributions for each Participant shall be limited to $___
		(D)	r	Other:

- 9 -

ii.	Eligibility for Other Contributions
	A Participant shall receive an allocation of other Employer contributions for the Plan Year if he satisfies the following requirements:
	(A)	r	Describe requirements:
	(B)	r	Is selected by the Employer in its sole discretion to receive an allocation of other Employer contributions
	(C)	r	No requirements
iii.	Time of Allocation
	Employer contributions, if made, will be allocated:
	(A)	r	As of the last day of the Plan Year
	(B)	r	At such time or times as the Employer shall determine in its sole discretion
	(C)	r	Other:

- 10 -

6.01	DISTRIBUTIONS
	The timing and form of payment of distributions made from the Participant’s vested Account shall be made in accordance with the elections made in this Section 6.01 of the Adoption Agreement.

a.	Timing of Distributions
	All distributions shall commence in accordance with the following (choose one):

(i)	þ	As soon as administratively practicable
(ii)	o	Monthly on specified day                                          (insert day)
(iii)	o	Annually on specified month and day                                          (insert month and day)
(iv)	o	Calendar quarter on specified day                                          (insert day)

Note: A six month delay for certain distributions to Key Employees of publicly traded companies will apply.

b. In addition to the distributions that will occur under the terms of the Plan (e.g., upon death or disability or six months from a separation from service), distributions can occur upon the following Distribution Events (If multiple events are chosen, the earliest to occur will trigger payment.)

			Lump Sum	Installments
(i)	þ	Specified Date [5 years, 10 years or 15 years from end of deferral period]	X	___years to ___years
(ii)	o	Specified Age		___years to ___years
(iii)	o	Separation from Service		___years to ___years
(iv)	o	Separation from Service plus 6 months		___years to ___years
(v)	o	Separation from Service plus ___months (not to exceed ___months)		___years to ___years
(vi)	o	Retirement		___years to ___years
(vii)	o	Retirement plus 6 months		___years to ___years
(viii)	o	Retirement plus ___months (not to exceed ___months)		___years to ___years
(ix)	o	Later of Separation from Service or Specified Age		___years to ___years
(x)	o	Later of Separation from Service or Specified Date		___years to ___years
(xi)	o	Later of Retirement or Specified Age		___years to ___years
(xii)	o	Later of Retirement or Specified Date		___years to ___years
(xiii)	o	Disability		___years to ___years

- 11 -

			Lump Sum	Installments
(xiv)	o	Death		___years to ___years
(xv)	o	Change in Control		___years to ___years

c.	Specified Date and Specified Age elections may not commence beyond age ___.
d.	Separation from Service (if this is elected, do not select “Separation from Service” under b. above)
	A Separation from Service override

þ Shall apply.

	A Separation from Service override provides that a Participant, whose Separation from Service occurs before Retirement, shall receive the vested amount credited to his Account as a lump sum payment.
e.	Involuntary Cashouts (Leave blank if not applicable)

(i) o If the Participant’s vested Account at the time of his Separation from Service does not exceed $___ (insert dollar amount) distribution of the vested Account shall automatically be made in the form of a single lump sum as soon as administratively practicable but in no event later than 60 days after the Separation of Service.

f.

Retirement

Retirement shall be defined as a Separation from Service that occurs on or after the Participant                                                                                                                                                                                                                                                                                          (insert description of requirements)

g.	Redeferrals
	A Participant

(i)	þ	Shall
(ii)	o	Shall Not

be permitted to modify a scheduled distribution date in accordance with Section 9.2 of the Plan.

A Participant shall generally be permitted to elect such modification one(1) number of times.

Administratively, allowable distribution events will be modified to reflect all options necessary to fulfill the redeferrals provision.

- 12 -

7.01 VESTING

a.	Matching Contributions
	The Participant’s vested interest in the amount credited to his Account attributable to Matching Contributions shall be based on the following schedule:

Years of Service	Vesting %
0
1
2
3
4
5
6
7
8
9

b.	Other Employer Contributions
	The Participant’s vested interest in the amount credited to his Account attributable to Employer contributions other than Matching Contributions shall be based on the following schedule:

Years of Service	Vesting %
0
1
2
3
4
5
6
7
8
9

c.	Acceleration of Vesting
	A Participant’s vested interest in his Account will automatically be 100% upon the occurrence of the following events: (select the ones that are applicable)

(i)	o	Death
(ii)	o	Disability
(iii)	o	Change in Control
(iv)	o	Eligibility for Retirement
(v)	o	Other:

- 13 -

d. Years of Service

i. A Participant’s Years of Service shall include all service performed for the Employer and

(A)	o	Shall
(B)	o	Shall Not

	include service performed for the Related Employer.
ii.	Years of Service shall also include service performed for the following entities:

iii.	Years of Service shall be determined in accordance with: (select one)
	(A)	o	The elapsed time method in Treas. Reg. Sec. 1.410(a)(7)
	(B)	o	The general method in DOL Reg. Sec. 2530.200b-1 through b-4
	(C)	o	The Participant’s Years of Service credited under
			(insert name of plan)
	(D)	o	Other:

- 14 -

8.01	UNFORESEEABLE EMERGENCY
	A withdrawal due to an Unforeseeable Emergency as defined in Section 2.2:

a.	þ	Will
b.	o	Will Not

be allowed.

- 15 -

9.01	INVESTMENT DECISIONS
	Investment decisions regarding the hypothetical amounts credited to a Participant’s Account shall be made by: (select one)

a.	þ	The Participant (or his Beneficiary)
b.	o	The Employer

Investment options are set forth in Appendix A.

- 16 -

10.01	GRANTOR TRUST
	The Employer: (select one)

a.	o	Does
b.	þ	Does Not

intend to establish a grantor trust in connection with the Plan, however it reserves the right to do so in its discretion.

- 17 -

11.01	TERMINATION UPON CHANGE IN CONTROL
	The Plan Sponsor

a.	þ	Reserves
b.	o	Does Not Reserve

	the right to terminate the Plan and distribute all vested amounts credited to Participant Accounts upon a Change in Control as described in Section 9.7.
11.02	CHANGE IN CONTROL
	A Change in Control for Plan purposes includes the following:

þ A change in the ownership of the Employer

þ A change in the effective control of the Employer

þ A change in the ownership of a substantial portion of the assets of the Employer

- 18 -

12.01	GOVERNING STATE LAW
	The laws of New York (insert name of state) shall apply in the administration of the Plan to the extent not preempted by ERISA.

- 19 -

EXECUTION PAGE

The Plan Sponsor has caused this Adoption Agreement to be executed this ___day of ___, 20___.

PLAN SPONSOR:

By:

Title:

- 20 -

APPENDIX A

INVESTMENT OPTIONS

Fund Name	Fund Number
Ø Fidelity Puritan	Ø Dodge & Cox Stock Fund
Ø Fidelity Magellan Fund	Ø American Funds Growth Fund of America
Ø Fidelity Growth and Income Fund	Ø Hotchkis & Wiley Mid Cap Value-Class I
Ø Fidelity Intermediate Bond Fund	Ø Artisan Mid Cap Fund
Ø Fidelity Diversified International Fund	Ø American Beacon Small Cap Value- PA
Ø Fidelity Retirement Money Market Portfolio	Ø Fidelity Small Cap Stock
Ø Spartan US Equity Index Portfolio	Ø
	Ø
Ø	Ø
Ø	Ø
Ø	Ø

Note: The Plan may not select a common/collective trust fund or a self-directed brokerage option as an investment option.

- 21 -

APPENDIX B

SUMMARY OF GRANDFATHERED PROVISIONS

- 22 -

APPENDIX C

ELIGIBLE PARTICIPANTS – For Fiscal 2006 Annual Performance Bonus

	Name
Russ Artzt
Mark Barrenechea
Joan Blackwood
Chris Broderick
Mike Christenson
Jeff Clarke
Mark Combs
Greg Corgan
Bob Davis
George Fischer
Donald Friedman
Patrick Gnazzo
Andrew Goodman
Sam Greenblatt
Yogesh Gupta
Kenneth Handal
Guy Harrison
Dan Kaferle
Kevin Kern
Jacob Lamm
Jeffrey Livingston
Marc Loupe
Alan Nugent
Una O’Neill
Claude Pumilia
Gary Quinn
Vince Re
Doug Robinson
Mary Stravinskas
John Swainson
Toby Weiss

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APPENDIX D

SPECIAL EFFECTIVE DATES

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COMPUTER ASSOCIATES INTERNATIONAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN

June 2005

TABLE OF CONTENTS

PREAMBLE

ARTICLE 1 – GENERAL
1.1	Plan
1.2	Effective Dates
1.3	Grandfathering of Amounts Not Subject to Code Section 409A
ARTICLE 2 – DEFINITIONS
2.1	Account
2.2	Administrator
2.3	Adoption Agreement
2.4	Beneficiary
2.5	Board or Board of Directors
2.6	Bonus
2.7	Change in Control
2.8	Code
2.9	Compensation
2.10	Disabled
2.11	Eligible Employee
2.12	Employer
2.13	ERISA
2.14	Key Employee
2.15	Participant
2.16	Plan
2.17	Plan Sponsor
2.18	Plan Year
2.19	Related Employer
2.20	Retirement
2.21	Separation from Service
2.22	Unforeseeable Emergency
2.23	Valuation Date
2.24	Years of Service
ARTICLE 3 – PARTICIPATION
3.1	Participation
3.2	Termination of Participation

i

ARTICLE 4 – PARTICIPANT CONTRIBUTIONS
4.1	Deferral Agreement
4.2	Amount of Deferral
4.3	Timing of Election to Defer
4.4	Election of Payment Schedule and Form of Payment
ARTICLE 5 – EMPLOYER CONTRIBUTIONS
5.1	Matching Contributions
5.2	Other Contributions
ARTICLE 6 – ACCOUNTS AND CREDITS
6.1	Establishment of Account
6.2	Credits to Account
ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS
7.1	Investment Options
7.2	Adjustment of Accounts
ARTICLE 8 – RIGHT TO BENEFITS
8.1	Vesting
8.2	Death
8.3	Disability
ARTICLE 9 – DISTRIBUTION OF BENEFITS
9.1	Amount of Benefits
9.2	Method and Timing of Distributions
9.3	Unforeseeable Emergency
9.4	Termination Before Retirement
9.5	Cashouts of Amounts Not Exceeding Stated Limit
9.6	Key Employees
9.7	Change in Control

ii

ARTICLE 10 – AMENDMENT AND TERMINATION
10.1	Amendment by Employer
10.2	Retroactive Amendments
10.3	Plan Termination
10.4	Distribution Upon Termination of the Plan
ARTICLE 11 – THE TRUST
11.1	Establishment of Trust
11.2	Grantor Trust
11.3	Investment of Trust Funds
ARTICLE 12 – PLAN ADMINISTRATION
12.1	Powers and Responsibilities of the Administrator
12.2	Claims and Review Procedures
12.3	Plan Administrative Costs
ARTICLE 13 – MISCELLANEOUS
13.1	Unsecured General Creditor of the Employer
13.2	Employer’s Liability
13.3	Limitation of Rights
13.4	Acceleration of Benefits
13.5	Facility of Payment
13.6	Notices
13.7	Tax Withholding
13.8	Indemnification
13.9	Governing Law

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PREAMBLE

The Computer Associates International, Inc. Executive Deferred Compensation Plan is intended to promote the interests of the Plan Sponsor and its shareholders by encouraging certain Eligible Employees to remain in the employ of the Plan Sponsor and its subsidiaries by providing them with a means by which they may request to defer receipt of a portion of their compensation.

ARTICLE 1 – GENERAL

1.1 Plan. The Plan will be referred to by the name specified in the Adoption Agreement.

1.2 Effective Dates.

(a)	Original Effective Date. The Original Effective Date is the date as of which the Plan was initially adopted.
(b)	Amendment Effective Date. The Amendment Effective Date is the date specified in the Adoption Agreement as of which the Plan is amended and restated.
(c)	Special Effective Date. A Special Effective Date may apply to any given provision if so specified in Appendix D. A Special Effective Date will control over the Original Effective Date or Amendment Effective Date, whichever is applicable, with respect to such provision of the Plan.

1.3 Grandfathering of Amounts Not Subject to Code Section 409A

If the Plan Sponsor has elected to treat amounts deferred before January 1, 2005 that are earned and vested on December 31, 2004 as subject to the provisions of the Plan as in effect on December 31, 2004, such grandfathered amounts will be separately accounted for and administered in accordance with the terms of the Plan as in effect on such date, except as otherwise provided in this Plan document. A summary of the grandfathered provisions is set forth in Appendix B.

Article 1-1

ARTICLE 2 – DEFINITIONS

Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

2.1	“Account” means an account established for the purpose of recording amounts credited on behalf of a Participant and any income, expenses, gains, losses or distributions included thereon. The Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant pursuant to the Plan.
2.2	“Administrator” means the person or persons designated by the Employer in Section 1.05 of the Adoption Agreement to be responsible for the administration of the Plan. If no Administrator is designated in the Adoption Agreement, the Administrator is the Employer.
2.3	“Adoption Agreement” means the agreement adopted by the Plan Sponsor that establishes the Plan.
2.4	“Beneficiary” means the persons, trusts, estates or other entitities entitled under Section 8.2 to receive benefits under the Plan upon the death of a Participant.
2.5	“Board” or “Board of Directors” means the Board of Directors of the Plan Sponsor.
2.6	“Bonus” means an amount of incentive remuneration payable by the Employer to a Participant.
2.7	“Change in Control” means the occurrence of an event involving the Employer that is described in Section 9.7.
2.8	“Code” means the Internal Revenue Code of 1986, as amended.
2.9	“Compensation” means the total cash and non-cash remuneration provided to a Participant by the Employer for services rendered in respect of a Plan Year, whether or not includible in the gross income of the Participant for Federal income tax purposes, including bonuses but excluding reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits.

Article 2-1

2.10	“Disabled” means a determination by the Administrator that the Participant is either (1) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (2) is, by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer.
2.11	“Eligible Employee” means an employee of the Employer who is determined by the Administrator to be a member of a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and who satisfies the requirements in Section 2.01 of the Adoption Agreement.
2.12	“Employer” means the Plan Sponsor and any other entity which is authorized by the Plan Sponsor to participate in and, in fact, does adopt the Plan.
2.13	“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
2.14	“Key Employee” means a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code.
2.15	“Participant” means an Eligible Employee who commences participation in the Plan in accordance with Article 3.
2.16	“Plan” means the unfunded plan of deferred compensation set forth herein, including the Adoption Agreement and any trust agreement, as adopted by the Employer and as amended from time to time.
2.17	“Plan Sponsor” means the entity specified in the Adoption Agreement.
2.18	“Plan Year” means the period specified in the Adoption Agreement.
2.19	“Related Employer” means the Employer and (a) any corporation that is a member of a controlled group of corporations as defined in Section 414(b) of the Code that includes the Employer, (b) any trade or business that is under common control as defined in Section 414(c) of the Code that includes the Employer, (c) any member of an affiliated service group as defined in Section 414(m) of the Code that includes the Employer, and (d) any entity required to be aggregated with the Employer by Section 414(o) of the Code.

Article 2-2

2.20	“Retirement” has the meaning specified in 6.01f of the Adoption Agreement.
2.21	“Separation from Service” is a “separation of service” within the meaning of Section 409A of the Code.
2.22	“Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or the Participant’s dependent (as defined in Code Section 152(a)); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
2.23	“Valuation Date” means each business day of the Plan Year and such other date(s) as designated by the Plan Sponsor.
2.24	“Years of Service” means a one year period for which the Participant receives service credit in accordance with the provisions of Section 7.01d of the Adoption Agreement.

Article 2-3

ARTICLE 3 – PARTICIPATION

3.1 Participation. The Participants in the Plan shall be those “management” or “highly compensated” employees of the Employer within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA who satisfy the requirements of Section 2.01 of the Adoption Agreement.

3.2 Termination of Participation. A Participant’s participation in the Plan shall cease upon the distribution to him of his vested Account or upon his death prior to such distribution. In addition, the Administrator may terminate a Participant’s eligibility to participate in the Plan but any such termination at the direction of the Administrator shall not take effect until the first day of the next Plan Year.

Article 3-1

ARTICLE 4 – PARTICIPANT CONTRIBUTIONS

4.1	Deferral Agreement. Each Eligible Employee may elect to defer his Compensation within the meaning of Section 3.01 of the Adoption Agreement by executing in writing or electronically, a deferral agreement in accordance with rules and procedures established by the Administrator and the provisions of this Article 4.
	A new deferral agreement must be timely executed for each Plan Year for which the Eligible Employee desires to defer Compensation. An Eligible Employee who does not timely execute a deferral agreement shall be deemed to have elected zero deferrals of Compensation for such Plan Year.
	A deferral agreement may be changed or revoked during the period specified by the Administrator. A deferral agreement becomes irrevocable at the close of the specified period.
	An Eligible Employee must have an executed deferral agreement in effect for each year during which an Employer contribution pursuant to Article 5, if any, may be made on his behalf.
4.2	Amount of Deferral. An Eligible Employee may elect to defer Compensation in any amount permitted by Section 4.01a of the Adoption Agreement.
4.3	Timing of Election to Defer. Each Eligible Employee who desires to defer Compensation otherwise payable in respect of a Plan Year must execute a deferral agreement within the period preceding the Plan Year specified by the Administrator. Each Eligible Employee who desires to defer Compensation that is a Bonus must execute a deferral agreement within the period preceding the Plan Year during which the Bonus is earned that is specified by the Administrator, except that if the Bonus can be treated as performance based compensation as described in Code Section 409A(a)(4)(B)(iii), the deferral agreement may be executed within the period specified by the Administrator, which period, in no event, shall end after the date which is six months prior to the end of the period during which the Bonus is earned.
	An employee who is classified or designated as an Eligible Employee during a Plan Year who is designated as eligible to participate during a Plan Year may elect to defer Compensation (as specified in Section 3.01 of the Adoption Agreement) otherwise earned in respect of the remainder of such Plan Year in accordance with the rules of this Section 4.3 by

Article 4-1

	executing a deferral agreement within the thirty (30) day period beginning on the date the employee is classified or designated as an Eligible Employee, if permitted by Section 2.01 of the Adoption Agreement.
4.4	Election of Payment Schedule and Form of Payment.
	At the time an Eligible Employee completes a deferral agreement, the Eligible Employee must elect a time and a form of payment for the Compensation subject to the deferral agreement from among the options the Administrator has made available for this purpose and which are specified in 6.01b of the Adoption Agreement.

Article 4-2

ARTICLE 5 – EMPLOYER CONTRIBUTIONS

5.1	Matching Contributions. If specified in Section 5.01a of the Adoption Agreement, the Employer will credit the Participant’s Account with a matching contribution determined in accordance with the formula specified therein. The matching contribution will be credited to the Participant’s Account at the time specified therein.
5.2	Other Contributions. If specified in Section 5.01b of the Adoption Agreement, the Employer will credit the Participant’s Account with a contribution determined in accordance with the formula or method specified in Section 5.01b of the Adoption Agreement. The contribution will be credited to the Participant’s Account at the time specified in Section 5.01b(iii) of the Adoption Agreement.

Article 5-1

ARTICLE 6 – ACCOUNTS AND CREDITS

6.1

Establishment of Account. For accounting and computational purposes only, the Administrator will establish and maintain an Account for each Participant which will reflect the credits made pursuant to Section 6.2 along with the earnings, expenses, gains and losses allocated thereto, attributable to the hypothetical investments made with the amounts in the Participant’s Account as provided in Article 7. The Administrator will establish and maintain such other records and accounts, as it decides in its discretion to be reasonably required or appropriate to discharge its duties under the Plan.

6.2

Credits to Account. A Participant’s Account will be credited for each Plan Year with the amount of his elective deferrals under Section 4.1 at the time the amount subject to the deferral election would otherwise have been payable to the Participant and the amount of Employer contributions made on his behalf under Article 5. Such amounts will be credited to the Participant’s Account at the times specified, respectively, in Sections 5.01a(iii) and 5.01b(iii) of the Adoption Agreement.

Article 6-1

ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS

7.1

Investment Options. The amount in a Participant’s Account shall be treated as invested in the investment options designated for this purpose by the Administrator and set forth in Appendix A to the Adoption Agreement.

7.2

Adjustment of Accounts. The amount in a Participant’s Account shall be adjusted for hypothetical investment earnings, expenses, gains or losses in an amount equal to the earnings, expenses, gains or losses attributable to the investment options selected by the party designated in Section 9.01 of the Adoption Agreement from among the investment options provided in Section 7.1. If permitted by Section 9.01 of the Adoption Agreement, a Participant may, in accordance with rules and procedures established by the Administrator, select the investments from among the options provided in Section 7.1 to be used for the purpose of calculating future hypothetical investment adjustments to the Participant’s Account or to future credits to the Account under Section 6.2 effective as the Valuation Date coincident with or next following notice to the Administrator. The Account of each Participant shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical earnings, expenses, gains and losses described above; (b) amounts credited pursuant to Section 6.2; and (c) payments. In addition, the Account of each Participant may be adjusted for its allocable share of the hypothetical costs and expenses associated with the maintenance of the hypothetical investments provided in Section 7.1.

Article 7-1

ARTICLE 8 – RIGHT TO BENEFITS

8.1	Vesting. A Participant, at all times, has a 100% nonforfeitable interest in the amounts credited to his Account attributable to his elective deferrals made in accordance with Section 4.1.
	A Participant’s right to the amounts credited to his Account attributable to Employer contributions made in accordance with Article 5 shall be determined in accordance with the relevant schedule specified in Section 7.01 of the Adoption Agreement.
8.2	Death. The balance or remaining balance credited to a Participant’s vested Account shall be paid to his estate in a single lump sum payment as soon as practicable following the Participant’s date of death.
8.3	Disability. The balance or remaining balance credited to a Participant’s vested Account shall be paid to the Participant in a single lump sum cash payment as soon as practicable following the date a Participant incurs a Disability as defined in Section 2.11, unless additional forms of payment have been made available for this purpose in Section 6.01b of the Adoption Agreement. If additional forms have been made available, payment shall be made at the time and in the form elected by the Participant in accordance with the provisions of articles 4 and 6. The Administrator, in its sole discretion, shall determine whether a Participant has experienced a disability for purposes of this Section 8.3.

Article 8-1

ARTICLE 9 – DISTRIBUTION OF BENEFITS

9.1	Amount of Benefits. The vested amount credited to a Participant’s Account as determined under Articles 6, 7 and 8 shall determine and constitute the basis for the value of benefits payable to the Participant under the Plan.
9.2	Method and Timing of Distributions. Except as otherwise provided in this Article 9, distributions under the Plan shall be made at the time and in the manner specified by the Participant in accordance with the provisions of Article 4. If permitted by Section 6.01g of the Adoption Agreement, a Participant may elect, at least twelve months before a scheduled date of distribution, to delay the payment date for a minimum period of sixty months from the originally scheduled date of payment and such election may not take effect until at least 12 months after the date on which the election is made. The re-deferral election must be made in accordance with procedures and rules established by the Administrator. The Participant may, at the same time the date of payment is deferred, change the form of payment but such change in the form of payment may not affect an acceleration of payment.
9.3	Unforeseeable Emergency. If permitted by Section 8.01 of the Adoption Agreement, a Participant may request a distribution due to an Unforeseeable Emergency. The request must be in writing and must be submitted to the Administrator along with evidence that the circumstances constitute an Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence it deems necessary to determine whether a distribution is warranted. Whether a Participant has incurred an Unforeseeable Emergency will be determined by the Administrator on the basis of the relevant facts and circumstances in its sole discretion, but, in no event, will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets to the extent such liquidation would not itself cause severe financial hardship, or (c) by cessation of deferrals under the Plan. A distribution due to an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need and may include any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution. The distribution will be made in the form of a single lump sum cash payment.

Article 9-1

9.4	Termination Before Retirement. If the Employer has elected a Separation from Service override in accordance with Section 6.01d of the Adoption Agreement, the following provisions apply. Subject to the provisions in Section 9.6, a Participant who experiences a Separation from Service before Retirement for any reason other than death shall receive the vested amount credited to his Account in a single lump sum payment as soon as practicable following such termination or cessation of service regardless of whether the Participant had made different elections of time or form of payment as to the vested amounts credited to his Account or whether the Participant was receiving installment payouts at the time of such termination.
9.5	Cashouts Of Amounts Not Exceeding Stated Limit. If the vested amount credited to the Participant’s Account does not exceed the limit established for this purpose by the Employer in Section 6.01e of the Adoption Agreement at the time he separates from service with the Employer for any reason, the Employer shall distribute such amount to the Participant in a single lump sum cash payment as soon as practicable following such termination regardless of whether the Participant had made different elections of time or form of payment as to the vested amount credited to his Account or whether the Participant was receiving installments at the time of such termination.
9.6	Key Employees. In no event shall a distribution made to a Key Employee from his Account by reason of his Separation from Service (other than as a result of such Key Employee’s death or Disability) occur before the date which is six months after the date of such Separation from Service with the Employer except in the case of (i) any distribution that occurs in connection with a Change in Control pursuant to Section 10.3 of this Plan or (ii) a distribution on a “specified date”, as elected by a Key Employee in accordance with Section 409A of the Code if specified in Section 6.01b of the Adoption Agreement.
9.7	Change in Control. If the Employer has elected to permit distributions upon a Change in Control, the following provisions shall apply. A distribution made upon a Change in Control will be made in the form elected by the Participant in accordance with the procedures described in Article 4. A Change in Control will occur upon a change in the ownership of the Employer, a change in the effective control of the Employer or a change in the ownership of a substantial portion of the assets of the Employer. The Employer, for this purpose, includes any corporation identified in this Section 9.7.
	If a Participant continues to make deferrals in accordance with Article 4 after he has received a distribution due to a Change in Control, the residual amount payable to the Participant shall be paid at the time and in

Article 9-2

the form specified in the elections he makes in accordance with Article 4 or upon his Death or Disability as provided in Article 8.

Whether a Change in Control has occurred will be determined by the Administrator in accordance with the rules and definitions set forth in this Section 9.7. A distribution to the Participant will be treated as occurring upon a Change in Control if the Plan Sponsor terminates the Plan and distributes the Participant’s benefits within twelve months of a Change in Control as provided in Section 10.3.

a)	Relevant Corporations. To constitute a Change in Control for purposes of the Plan, the event must relate to (i) the corporation for whom the Participant is performing services at the time of the Change in Control, (ii) the corporation that is liable for the payment of the Participant’s benefits under the Plan (or all corporations liable if more than one corporation is liable), or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority corporation of another corporation in the chain, ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a shareholder owning more than fifty percent (50%) of the total fair market value and voting power of such corporation.
b)	Stock Ownership. Code Section 318(a) applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation Section 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option. Mutual and cooperative corporations are treated as having stock for purposes of this Section 9.7.
c)	Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. If any one person or more than one person acting as a proxy is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as

Article 9-3

discussed below in Section 9.7(d)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 9.7(c) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of this Section 9.7(c), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

d) Change in the effective control of a corporation. A change in the effective control of a corporation occurs on the date that either (i) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty-five (35%) or more of the total voting power of the stock of such corporation, or (ii) a majority of members of the corporation’s board of directors is replaced during any twelve month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this paragraph (ii), the term corporation refers solely to the relevant corporation identified in Section 9.7(a) for which no other corporation is a majority shareholder for purposes of Section 9.7(a). In the absence of an event described in Section 9.7(d)(i) or (ii), a change in the effective control of a corporation will not have occurred. A change in effective control may also occur in any transaction in which either of the two corporations involved in the transaction has a change in the ownership of such corporation as described in Section 9.7(c) or a change in the ownership of a substantial portion of the assets of such corporation as described in Section 9.7(e). If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of this Section 9.7(d), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation or to cause

Article 9-4

a change in the ownership of the corporation within the meaning of Section 9.7(c). For purposes of this Section 9.7(d), persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in Section 9.7(c) with the following exception. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

e)

Change in the ownership of a substantial portion of a corporation’s assets. A change in the ownership of a substantial portion of a corporation’s assets occurs on the date that any one person, or more than one person acting as a group (as determined in accordance with rules similar to those set forth in Section 9.7(d)), acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation of the value of the assets being disposed of determined without regard to any liabilities associated with such assets. There is no Change in Control event under this Section 9.7(e) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 9.7(e)(iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets.

Article 9-5

ARTICLE 10 – AMENDMENT AND TERMINATION

10.1	Amendment by Employer. The Plan Sponsor reserves the right to amend the Plan (for itself and each Employer) through action of the Compensation and Human Resource Committee of the Board of Directors (the “Compensation Committee”). Each amendment shall be effective as determined by the Compensation Committee in its resolution. No amendment can directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of his Account which had accrued prior to the amendment.
10.2	Retroactive Amendments. An amendment made by the Plan Sponsor in accordance with Section 10.1 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if such amendment is necessary or appropriate to enable the Plan to satisfy the applicable requirements of the Code or ERISA or to conform the Plan to any change in federal law or to any regulations or ruling thereunder. Any retroactive amendment by the Plan Sponsor shall be subject to the provisions of Section 10.1.
10.3	Plan Termination. If specified in 11.01 of the Adoption Agreement, the Plan Sponsor reserves the right to terminate the Plan and distribute all amounts credited to all Participant Accounts as soon as administratively feasible, but in no event later than twelve months, following a Change in Control as determined in accordance with the rules set forth in Section 9.7. In addition, the Plan Sponsor reserves the right to terminate the Plan to the extent permitted by Code Section 409A, including a termination at any time with respect to any deferrals made after the effective date of such termination.
10.4	Distribution Upon Termination of the Plan. Except as provided in Section 10.3, the Plan may not be terminated before the date on which all amounts credited to all Participant Accounts have been distributed in accordance with Articles 8 and 9.

Article 10-1

ARTICLE 11 – THE TRUST

11.1	Establishment of Trust. The Plan Sponsor may but is not required to establish a trust to hold amounts to which the Employers may contribute from time to time to correspond to some or all amounts credited to Participants under Section 6.2. If the Plan Sponsor elects to establish a trust in accordance with Section 10.01 of the Adoption Agreement, the provisions of Sections 11.2 and 11.3 shall become operative.
11.2	Grantor Trust. Any trust established by the Plan Sponsor shall be between the Plan Sponsor and a trustee pursuant to a separate written agreement under which assets are held, administered and managed, subject to the claims of the Employer’s creditors in the event of the Employer’s insolvency, until paid to the Participant and/or his Beneficiaries specified in the Plan. The trust is intended to be treated as a grantor trust under the Code, and the establishment of the trust shall not cause the Participant to realize current income on amounts contributed thereto. The Plan Sponsor must notify the trustee in the event of a lawsuit, bankruptcy or insolvency.
11.3	Investment of Trust Funds. Any amounts contributed to the trust shall be invested by the trustee in accordance with the provisions of the trust and the instructions of the Administrator. Trust investments need not reflect the hypothetical investments selected by Participants under Section 7.1 for the purpose of adjusting Accounts and the earnings or investment results of the trust shall not affect the hypothetical investment adjustments to Participant Accounts under the Plan.

Article 11-1

ARTICLE 12 – PLAN ADMINISTRATION

12.1 Powers and Responsibilities of the Administrator. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a)	To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;
(b)	To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan;
(c)	To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan;
(d)	To administer the claims and review procedures specified in Section 12.2;
(e)	To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;
(f)	To determine the person or persons to whom such benefits will be paid;
(g)	To authorize the payment of benefits;
(h)	To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA;
(i)	To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;
(j)	By written instrument, to allocate and delegate its responsibilities, including the formation of an Administrative Committee to administer the Plan.

Article 12-1

12.2 Claims and Review Procedures.

(a)

Claims Procedure. If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial, (ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) information as to the steps to be taken if the person wishes to submit a request for review. Such notification will be given within 90 days after the claim is received by the Administrator (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to such person within the initial 90-day period). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim.

(b)

Review Procedure. Within 60 days after the date on which a person receives a written notification of denial of claim (or, if written notification is not provided, within 60 days of the date denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The decision on review will be made within 60 days after the request for review is received by the Administrator (or within 120 days, if special circumstances require an extension of time for processing the request, such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period). If the decision on review is not made within such period, the claim will be considered denied.

Article 12-2

12.3 Plan Administrative Costs. All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator in administering the Plan shall be paid by the Employer.

Article 12-3

ARTICLE 13 – MISCELLANEOUS

13.1	Unsecured General Creditor of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of any Employer. For purposes of the payment of benefits under the Plan, any and all of the Employer’s assets shall be, and shall remain, the general, unpledged, unrestricted assets of the Employer. Each Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.
13.2	Employer’s Liability. Each Employer’s liability for the payment of benefits under the Plan shall be defined only by the Plan and by the deferral agreements entered into between a Participant and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as provided by the Plan and a deferral agreement or agreements. An Employer shall have no liability to Participants employed by other Employers.
13.3	Limitation of Rights. Neither the establishment of the Plan, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to the Participant or any other person any legal or equitable right against the Employer or Administrator, except as provided herein; and in no event will the terms of employment or service of the Participant be modified or in any way affected hereby.
13.4	Acceleration of Benefits. None of the benefits or rights of a Participant or any Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the fullest extent permitted by law, all such benefits and rights shall be free from attachment, garnishment, or any other legal or equitable process available to any creditor of the Participant and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she may expect to receive, contingently or otherwise, under this Plan, except the right to designate a Beneficiary to receive death benefits provided hereunder. A distribution made to comply with Federal conflict of interest requirements shall be permitted, notwithstanding any elections made by the Participant to the contrary.
13.5	Facility of Payment. If the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may direct the Employer to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care

	and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Employer for the payment of benefits hereunder to such recipient.
13.6	Notices. Any notice or other communication in connection with the Plan shall be deemed delivered in writing if addressed as provided below and if either actually delivered at said address or, in the case or a letter, 5 business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified:

(a)	If it is sent to the Employer or Administrator, it will be at the address specified by the Employer; or
(b)	In each case at such address as the addressee shall have specified by written notice delivered in accordance with the foregoing to the addressor’s then effective notice address.

13.7	Tax Withholding. The Employer shall have the right to deduct from all payments or deferrals made under the Plan any tax required by law to be withheld. If the Employer concludes that tax is owing with respect to any deferral or payment hereunder, the Employer shall withhold such amounts from any payments due the Participant, as permitted by law, or otherwise make appropriate arrangements with the Participant or his Beneficiary for satisfaction of such obligation. Tax, for purposes of this Section 13.7 means any federal, state, local or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any earnings thereon, and any payments made to Participants under the Plan.
13.8	Indemnification. Each Employer shall indemnify, to the full extent permitted by law, each employee, officer or director made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that he, or his testator or intestate, is or was delegated duties, responsibilities, and authority with respect to the Plan.
13.9	Governing Law. The Plan shall be construed, administered and governed in all respects under and by the laws of the State of New York, without reference to the principles of conflicts of law (except if and to the extent preempted by applicable Federal law). It is the intent of the Plan Sponsor that this Plan be considered and interpreted in all respects as part of a bonus plan within the meaning of U. S. Department of Labor Regulation Section 2510.3-2(c) and not in any respect as an employee pension plan for purposes of ERISA. If and to the extent that any portion of this Plan shall be determined to be an employee pension benefit plan subject to ERISA, then such portion shall be considered a separate plan covering only those Participants as to whom this Plan is determined to be a pension plan. Such pension plan shall in all

respects be considered and interpreted as a plan which is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees and exempt from coverage of Parts 1, 2, 3 and 4 of Subtitle B of Title I of ERISA to the maximum extent permissible under the provisions thereof. Further, it is the intent of the Plan Sponsor that this Plan be considered and interpreted in all respects as a nonqualified deferred compensation plan satisfying the requirements of Section 409A of the Code and deferring the recognition of income by Participants in respect of amounts credited to Participant Accounts until amounts are actually paid to them pursuant to the Plan.

EX-15.1

Exhibit 15.1

November 8, 2005
Computer Associates International, Inc.
One Computer Associates Plaza
Islandia, New York 11749

Re:   Registration Statement Nos. 333-127602, 333-127601, 333-120849, 333-126273, 333-108665, 333-100896, 333-88916,
333-32942, 333-31284, 333-83147, 333-80883, 333-79727, 333-62055, 333-19071, 333-04801, 33-64377, 33-53915, 33-53572, 33-34607, 33-18322, 33-20797, 33-30347, 33-35515, 2-92355, 2-87495 and 2-79751 on Form S-8

With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated November 8, 2005 related to our review of interim financial information. As discussed in Note D to the consolidated condensed financial statements, the Company has restated the consolidated condensed balance sheet at March 31, 2005, the consolidated condensed statements of operations for the three-month and six-month periods ended September 30, 2004 and the consolidated condensed statement of cash flows for the six-month period ended September 30, 2004 to reflect the Company’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” on April 1, 2005 under the modified retrospective application method and to reflect the effects of certain prior period restatements that were previously disclosed in Note 12 of the consolidated financial statements in the Company’s Form 10-K/A for the fiscal year ended March 31, 2005.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.

/s/  KPMG LLP

New York, New York

EX-31.1

Exhibit 31.1

CEO CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John A. Swainson, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Computer Associates International, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005	By:	/s/ John A. Swainson
		John A. Swainson
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CFO CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert W. Davis, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Computer Associates International, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005	By:	/s/ Robert W. Davis
		Robert W. Davis
		Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Computer Associates International, Inc., a Delaware corporation (the “Company”), on Form 10-Q for the quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission (the “Report”), each of John A. Swainson, President and Chief Executive Officer of the Company and Robert W. Davis, Executive Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. Swainson

John A. Swainson

President and Chief Executive Officer

November 9, 2005

/s/ Robert W. Davis

Robert W. Davis

Executive Vice President and Chief Financial Officer

November 9, 2005

The foregoing certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that Section. The foregoing certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.