You should read the following discussion in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q.

Second Quarter Financial Overview

As more fully discussed in later sections of this MD&A, the following were significant financial items for the second quarter of 2009:

• Total revenue was $421 million for the second quarter of 2009, down 7% from the second quarter of 2008. The total year-over-year revenue comparison included a 5% adverse impact from foreign currency fluctuations. Lower product revenue and the impact of foreign currency translation were the primary drivers in the reported year-over-year revenue decline.

• Gross margin increased to 55.3% in the second quarter of 2009 from 54.7% in the second quarter of 2008. Gross margins improved primarily due to the professional services business, which experienced better utilization rates of internal resources, lower third-party costs, and lower travel expenses.

• Operating income was $84 million in the second quarter of 2009, compared to $92 million in the second quarter of 2008. The decrease in operating income was largely due to lower product revenue, which was offset in part by improved gross margins and lower operating expenses. Within operating expenses, $10 million of lower selling, general and administrative ("SG&A") expenses were partially offset by $2 million higher research and development ("R&D") expenses as compared to the second quarter of 2008.

• Net income of $62 million in the second quarter of 2009 decreased from $69 million in the second quarter of 2008.

Strategic Overview

Teradata is in a leadership position to help companies manage the continual increases in data volume and complexity and gain a competitive advantage. We have four key initiatives underway to broaden our position in the market and take advantage of this opportunity. These initiatives include continuing to:

• Increase our market coverage through additional sales territories (hiring sales account executives as well as technology and industry consultants),

• Invest to extend Teradata's core technology and expand our family of compatible data warehouse platforms to address multiple market segments,

• Differentiate Teradata technology and driving platform demand by delivering services that enable customers to achieve best-in-class analytics, and

• Invest in strategic partnerships to increase the number of solutions available on Teradata platforms, to provide more market coverage and to maximize customer value.

Future Trends

We believe that demand for our solutions will continue due to the continued increase in data volumes, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity.

Recently, the United States and global economies have experienced a significant downturn driven by a financial and credit crisis that could continue to challenge such economies for some period of time, and may have a negative effect on our business. We continue to see a longer sales cycle for enterprise data warehousing solutions, particularly in the United States, as a result of closer scrutiny and tighter review processes for larger capital expenditures during 2009; however, we anticipate an opportunity for shorter sales cycles for our new purpose-built data warehouse appliance platforms. The size, timing and contracted terms of large customer orders for our products and services can impact, both positively and negatively, our long-term operating results. Variances in the operating results for an individual quarterly period can be significantly impacted by a few large sales transactions. This dynamic is even more pronounced when viewing results for an individual operating region, or by sub-category (product, professional services or maintenance services). As a result, we believe that trends in operating results are more effectively analyzed on an annual basis. In addition to the uncertainty created by the economic environment, we expect approximately 3 percentage points of negative impact from currency translation on our reported 2009 revenue and a corresponding currency impact on operating income, based on currency rates as of July 30, 2009.

While macroeconomic challenges and fluctuations in the information technology environment do occur, our long-term outlook remains positive. We did not experience significant changes in the first six months of 2009 due to competitive and/or technological pricing trends, although there is a risk that pricing pressure could occur in the future. We continue to be committed to new product development and achieving maximum yield from our research and development spending and resources, which are intended to drive revenue growth, as evidenced by the recent expansion of our purpose-built Teradata Platform Family, as well as Teradata's new version of core database software, Teradata 13, which was released in late June, 2009. As an example of our expanding set of strategic partnerships, a new agreement with SAP was announced in the second quarter of 2009 to provide SAP NetWeaver® Business Warehouse on the Teradata database, enabling customers to more efficiently access data in the Teradata data warehouse for business analytics. We also continue to evaluate opportunities to increase our market coverage and are committed to continuing to expand our sales territories, among other things, to drive future revenue growth. We added over 40 new sales territories in 2008 and remain on track to have added a total of 60 new sales territories cumulatively by the end of 2009. Given the length of sales cycles in the data warehouse market, new sales account territories typically take a year or more, on average, to become productive. As we did in the first six months, we plan

to continue throughout 2009 to actively scrutinize our overall selling expense, including monitoring the pace of adding new sales territories as well as tightly managing our professional services costs structure in an effort to keep such cost in line with revenue trends. We continue to expect SG&A expenses in 2009 to be at or below our 2008 levels, while absorbing the expense of our strategic initiatives, including sales territory expansion and investments in partnerships. However, we expect R&D expenses in 2009 to be higher than the $108 million experienced in 2008, and closer to the $126 million level seen in 2007.

Results of Operations for the Three Months Ended June 30, 2009

Compared to the Three Months Ended June 30, 2008



                                                           % of                 % of
   In millions                                    2009    Revenue      2008    Revenue
   Product revenue                                $ 185      43.9 %    $ 221      48.6 %
   Service revenue                                  236      56.1 %      234      51.4 %

   Total revenue                                    421       100 %      455       100 %

   Gross margin
   Product gross margin                             119      64.3 %      146      66.1 %
   Service gross margin                             114      48.3 %      103      44.0 %

   Total gross margin                               233      55.3 %      249      54.7 %

   Operating expenses
   Selling, general and administrative expenses     122      29.0 %      132      29.0 %
   Research and development expenses                 27       6.4 %       25       5.5 %

   Total operating expenses                         149      35.4 %      157      34.5 %

   Operating income                               $  84      20.0 %    $  92      20.2 %

Revenue

Teradata revenue decreased 7% in the second quarter of 2009 compared to the second quarter of 2008. The revenue decline included a net adverse effect of 5% from foreign currency fluctuations. Product revenue decreased 16% in the second quarter of 2009 from the prior year, with reductions in all three regions. Service revenue in the second quarter of 2009 increased 1% from the prior year, with an underlying 1% increase in professional and installation-related services revenue, as well as maintenance services revenue, as compared to the prior year.

Gross Margin

Gross margin for the second quarter of 2009 was 55.3% compared to 54.7% in the second quarter of 2008. Product gross margin decreased to 64.3% in the second quarter of 2009, compared to 66.1% in the prior-year period. The decrease in product margins was driven primarily by lower volume and the impact of currency translation on foreign currency-denominated revenue given the largely U.S. dollar-denominated product cost. Service gross margin improved to 48.3% in the second quarter of 2009 compared to 44.0% in the prior-year period. Services margins improvements were driven by our professional services business, due to lower outside contractor costs, lower overhead costs, lower travel expenses and improved utilization of internal resources. Utilization rates were assisted in part by the lack of hiring activity within the professional services organization in the quarter, given the additional training activities typically associated with new hires. In terms of overall gross margins, the improvement in services margins more than offset the margin impact of having a lower proportion of product revenue, in relation to services revenue, as compared to the prior-year period.

Operating Expenses

Total operating expenses, characterized as SG&A and R&D expenses, were $149 million in the second quarter of 2009 compared to $157 million in the second quarter of 2008. The $10 million decrease in SG&A expenses benefited from foreign currency translation, certain reductions in corporate expenses and lower travel expenses, which more than offset the cost of the new sales territory expansions.

Revenue and Gross Margin by Operating Segment

As described in Note 10 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata manages its business in three geographic regions, which are also the Company's operating segments: (1) the Americas region; (2) the EMEA region; and (3) the APJ region. Teradata believes this format is useful to investors because it allows analysis and comparability of operating trends by operating segment. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess our financial performance. The discussion of our segment results describes the changes in results as compared to the prior-year period.

The following table presents revenue and operating performance by segment for the three months ended June 30:

                                              % of                 % of
                In millions          2009    Revenue      2008    Revenue
                Revenue
                Americas             $ 229        54 %    $ 236        52 %
                EMEA                   118        28 %      128        28 %
                APJ                     74        18 %       91        20 %

                Total revenue          421       100 %      455       100 %

                Gross margin
                Americas               133      58.1 %      136      57.6 %
                EMEA                    64      54.2 %       68      53.1 %
                APJ                     36      48.6 %       45      49.5 %

                Total gross margin   $ 233      55.3 %    $ 249      54.7 %

Americas: Revenue decreased 3% in the second quarter of 2009 from the second quarter of 2008, as an 8% decrease in product revenue was offset somewhat by higher services revenue. The revenue decline included a 2% adverse effect from foreign currency fluctuations. Gross margin increased to 58.1% for the second quarter of 2009, from 57.6% in the second quarter of 2008, driven primarily by increases in professional services margins as compared to the prior-year period, which benefited from higher utilization rates, lower outside contractor expense and overall cost management.

EMEA: Revenue decreased 8% in the second quarter of 2009 from the second quarter of 2008, driven by roughly comparable decreases in product and services revenue. The revenue decline included 14% of adverse impact from foreign currency fluctuations. Gross margin increased to 54.2% for the second quarter of 2009, from 53.1% in the second quarter of 2008, with improvements in professional services margins, offset in part by foreign currency translation, and an adverse mix of hardware content and third-party product, as compared to the prior period.

APJ: Revenue decreased 19% in the second quarter of 2009 from the second quarter of 2008, with a decrease in product revenue offset in part by higher services revenue. The revenue decline included 2% of negative impact from foreign currency fluctuations. Gross margin decreased to 48.6% in the second quarter of 2009, from 49.5% in the second quarter of 2008. The decrease in gross margins were driven primarily by the lower proportion of product revenue as compared to services revenue, somewhat offset by improved professional services margin rates as compared to the prior-year period.

Provision for Income Taxes

The effective tax rate in the second quarter of 2009 was 26.2% compared to 26.6% in the second quarter of 2008. The tax rate for the three months ended June 30, 2009 and June 30, 2008 is based on the pre-tax earnings mix by jurisdiction of Teradata and its subsidiaries under the Company's current structure after considering items specifically related to the interim periods. There were no significant discrete tax items for the three months ended June 30, 2009 and June 30 2008.

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company's intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that apply a broad range of statutory income tax rates, certain of which are less than the U.S. statutory rate.

Results of Operations for the Six Months Ended June 30, 2009

Compared to the Six Months Ended June 30, 2008



                                                           % of                 % of
   In millions                                    2009    Revenue      2008    Revenue
   Product revenue                                $ 342      43.4 %    $ 386      46.5 %
   Service revenue                                  446      56.6 %      444      53.5 %

   Total revenue                                    788       100 %      830       100 %

   Gross margin
   Product gross margin                             222      64.9 %      251      65.0 %
   Service gross margin                             211      47.3 %      192      43.2 %

   Total gross margin                               433      54.9 %      443      53.4 %

   Operating expenses
   Selling, general and administrative expenses     232      29.4 %      248      29.9 %
   Research and development expenses                 57       7.2 %       50       6.0 %

   Total operating expenses                         289      36.7 %      298      35.9 %

   Operating income                               $ 144      18.3 %    $ 145      17.5 %

Revenue

Teradata revenue decreased 5% in the first six months of 2009 compared to the first six months of 2008. The revenue decline included a net adverse effect of 6% from foreign currency fluctuations. Product revenue decreased 11% in the first six months of 2009 from the prior year, with declines in all three regions. Service revenue in the first six months of 2009 was roughly unchanged from the prior year, with only a slight increase in maintenance services revenue.

Gross Margin

Gross margin for the first six months of 2009 was 54.9% compared to 53.4% in the first six months of 2008. Product gross margin was roughly unchanged at 64.9% in the first six months of 2009, compared to 65.0% in the prior-year period. Service gross margin improved to 47.3% in the first six months of 2009 compared to 43.2% in the prior-year period. Services margins improved primarily due to improvements within professional services, which benefited from lower overhead costs, lower outside contractor costs, improved utilization of internal resources and lower travel expenses. Utilization rates were assisted in part by the lack of hiring activity within the professional services organization in the current year, given the additional training activities typically associated with new hires. The

improvement in services margins more than offset the margin impact of having a lower proportion of product revenue, in relation to services revenue, as compared to the prior-year period.

Operating Expenses

Total operating expenses were $289 million in the first six months of 2009 compared to $298 million in the first six months of 2008. The $16 million decrease in SG&A expenses was driven by the impact of foreign currency translation, certain reductions in corporate expenses and lower travel expenses, which more than offset the cost of the new sales territory expansions. R&D expenses increased by $7 million in the first six months of 2009, compared to the first six months of 2008, resulting largely from $5 million less in capitalization of software development cost.

Revenue and Gross Margin by Operating Segment

The following table presents revenue and operating performance by segment for
the six months ended June 30:



                                              % of                 % of
                In millions          2009    Revenue      2008    Revenue
                Revenue
                Americas             $ 434        55 %    $ 446        54 %
                EMEA                   215        27 %      231        28 %
                APJ                    139        18 %      153        18 %

                Total revenue          788       100 %      830       100 %

                Gross margin
                Americas               250      57.6 %      250      56.1 %
                EMEA                   117      54.4 %      120      51.9 %
                APJ                     66      47.5 %       73      47.7 %

                Total gross margin   $ 433      54.9 %    $ 443      53.4 %

Americas: Revenue decreased 3% in the first six months of 2009 from the first six months of 2008, as a 10% decrease in product revenue was offset somewhat by higher services revenue. The revenue decline included a 2% adverse effect from foreign currency fluctuations. Gross margin increased to 57.6% for the first six months of 2009, from 56.1% in the first six months of 2008, primarily driven by increases in professional services margins, which benefited from higher utilization rates, lower outside contractor expense and overall cost management. This improvement was offset somewhat by the impact of a lower proportion of product revenue, in relation to services revenue, as compared to the prior-year period.

EMEA: Revenue decreased 7% in the first six months of 2009 from the first six months of 2008, driven by comparable decreases in product, professional services and maintenance services revenue. The revenue decline included 16% of adverse impact from foreign currency fluctuations. Gross margin increased to 54.4% for the first six months of 2009, from 51.9% in the first six months of 2008, driven by increases in services margins, primarily within professional services.

APJ: Revenue decreased 9% in the first six months of 2009 from the first six months of 2008, driven by a decrease in product revenue. The revenue decline included 3% of negative impact from foreign currency fluctuations. Gross margin decreased to 47.5% in the first six months of 2009, from 47.7% in the first six months of 2008. The decrease in gross margins were driven primarily by the smaller proportion of product revenue as compared to services revenue, and to a lesser extent lower product margins, which was largely offset by higher professional services margin rates as compared to the prior-year period.

Provision for Income Taxes

The effective tax rate for the first six months of 2009 was 25.7% as compared to 26.0% for the first six months of 2008. The tax rate for the six months ended June 30, 2009 and June 30, 2008 is based on the pre-tax earnings mix by

jurisdiction of Teradata and its subsidiaries under the Company's current structure after considering items specifically related to the interim periods. There were no significant discrete tax items for the six months ended June 30, 2009 and June 30 2008.

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company's intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that apply a broad range of statutory income tax rates, certain of which are less than the U.S. statutory rate.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities increased by $40 million in the first six months of 2009. In comparison to the prior-year period, the increase in cash provided by operating activities in the six months ended June 30, 2009 was principally due to a greater decrease in accounts receivables and a positive change in other assets and liabilities, which was primarily driven by a decrease in other current assets as compared to an increase in the prior period comparison. The greater reduction in accounts receivable was driven by positive collection activity in the current-year period, though collection activity will vary from period to period. These improvements were partially offset by having flat inventory levels in the first six months of 2009, compared to a reduction of inventory in the first six months of 2008.

Teradata's management uses a non-GAAP measure called "free cash flow," which we define as net cash provided by operating activities less capital expenditures for property and equipment, and additions to capitalized software, as one measure of assessing the financial performance of the Company. Free cash flow does not have a uniform definition under GAAP; and therefore, Teradata's definition of this measure may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company's existing businesses, strategic acquisitions and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

The table below shows net cash provided by operating activities and capital expenditures for the following periods:

                                                        Six Months Ended
                                                            June 30,
          In millions                                   2009          2008
          Net cash provided by operating activities   $    268        $ 228
          Less:
          Expenditures for property and equipment          (13 )        (11 )
          Additions to capitalized software                (27 )        (32 )

          Free cash flow                              $    228        $ 185

Financing activities and certain other investing activities are not included in our calculation of free cash flow. These other investing activities in the first six months of 2009 primarily consisted of $25 million in purchases of short-term investments and $65 million in proceeds collected from maturities of short-term investments. Teradata's short-term investments consist of bank time deposits with original maturities between three months and one year. Other investing activities in the first six months of 2008 primarily consisted of $50 million in purchases of short-term investments, as well as an immaterial acquisition consummated during the first quarter. Teradata's financing

activities for the six months ended June 30, 2009 and June 30, 2008 consisted primarily of cash outflows from our share repurchase activities. During the first six months of 2009, the Company purchased 2.7 million shares of its common stock at an average price per share of $18.61 under share repurchase programs authorized by our Board of Directors in 2008. The first program (the "dilution offset program") authorizes the Company to purchase Teradata common stock to the extent of cash received from the exercise of stock options and the Teradata Employee Stock Purchase Plan. The second program (the "general share repurchase program") initially authorized the Company to repurchase an additional $250 . . .