The following combined discussion and analysis of SAIC's and Science Applications' financial condition and results of operations and quantitative and qualitative disclosures about market risk should be read in conjunction with our condensed consolidated financial statements and related combined notes. As SAIC is a holding company and consolidates Science Applications for financial statement purposes, disclosures that relate to activities of Science Applications also apply to SAIC, unless otherwise noted. Science Applications' revenues and operating expenses comprise 100% of SAIC's revenues and operating expenses. In addition, Science Applications comprises approximately the entire balance of SAIC's assets, liabilities and operating cash flows. Therefore, the following discussion is applicable to both SAIC and Science Applications, unless otherwise noted.

The following discussion contains forward-looking statements, including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, government budgets, spending and the impact of competition, our intent to create two independent public companies and our expectation that the separation transaction will be a tax-free spin-off. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012, as updated periodically through our subsequent quarterly reports on Form 10-Q. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

Except with respect to "Results of Operations-Discontinued Operations" and "-Net Income," and "-Diluted EPS," all amounts in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are presented for our continuing operations.

We use the terms "Company", "we", "us" and "our" to refer to SAIC, Science Applications and its consolidated subsidiaries. Unless otherwise noted, references to years are for fiscal years ended January 31. For example, we refer to the fiscal year ending January 31, 2013 as "fiscal 2013."

Overview

We are a provider of scientific, engineering, systems integration and technical services and solutions in the areas of defense, health, energy, infrastructure, intelligence, surveillance, reconnaissance and cybersecurity to agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers in select commercial markets.

Our business is focused on using deep domain knowledge to solve problems of vital importance to the nation and the world in the areas of national security, energy and the environment, critical infrastructure and health. We are focusing our investments in our strategic growth areas including: intelligence, surveillance and reconnaissance; cybersecurity; logistics, readiness and sustainment; energy and environment; and health information technology. Our significant long-term management initiatives include:

• achieving internal, or non-acquisition related, annual revenue growth through internal collaboration and better leveraging of key differentiators across our company and the deployment of resources and investments into higher growth markets;

• improving our operating income margin through strong contract execution and growth in higher-margin business areas and continued improvement in our information technology (IT) systems infrastructure and related business processes for greater effectiveness and efficiency across all business functions;

• disciplined deployment of our cash resources and use of our capital structure to enhance growth and stockholder value through internal growth initiatives, strategic acquisitions, stock repurchases, dividends and other uses as conditions warrant; and

• investing in our people, including enhanced training and career development programs, with a focus on retention and recruiting.

Key financial highlights and events, including progress against management's initiatives, during the three months ended October 31, 2012 include:

• Revenues for the three months ended October 31, 2012 increased 3% over the same period in the prior year, reflecting internal revenue growth (as defined in "Non-GAAP Financial Measures") of 1%. Internal revenue growth was driven

primarily by increased activity in our Defense Solutions segment partially offset by declines in our Health, Energy and Civil Solutions and Intelligence and Cybersecurity Solutions segments. Revenues for the three months ended October 31, 2011 were negatively impacted by the portion of the loss provision recorded against revenues ($52 million) in connection with the CityTime matter described in Note 10 of the combined notes to the condensed consolidated financial statements.

• Operating income increased $213 million to $193 million (6.7% as a percentage of revenues) for the three months ended October 31, 2012 from an operating loss of $20 million for the same period in the prior year. The increase in operating income is primarily due to the loss provision ($232 million) recorded in the prior year in connection with the CityTime matter described in Note 10 of the combined notes to the condensed consolidated financial statements. In addition, operating income for the three months ended October 31, 2012 reflects increased indirect spending ($15 million), including charges associated with the corporate relocation and the announced separation transaction discussed below, partially offset by fees on increased revenues.

• Income from continuing operations for the three months ended October 31, 2012 increased $204 million as compared to the same period in the prior year due to the increase in operating income, a decrease in interest expense and a lower effective tax rate.

• Diluted earnings per share (EPS) from continuing operations for the three months ended October 31, 2012 increased $0.61 as compared to the same period in the prior year primarily due to the increase in income from continuing operations partially offset by an increase in the diluted weighted average number of shares outstanding of 5 million, or 2%.

• Cash and cash equivalents decreased $225 million during the three months ended October 31, 2012 primarily due to cash used to acquire a business for $478 million and dividend payments of $41 million partially offset by cash generated from operations of $295 million.

• Net bookings (as defined in "Key Financial Metrics-Bookings and Backlog") were approximately $4.8 billion for the three months ended October 31, 2012. Total backlog was $18.6 billion at October 31, 2012 as compared to $16.5 billion at July 31, 2012.

Planned Separation Transaction

In August 2012, we announced that our board of directors authorized management to pursue a plan to separate into two independent, publicly traded companies:
(i) a company focused on government technology and enterprise information technology services; and (ii) a company focused on delivering science and technology solutions primarily in the areas of national security, engineering and health.

The proposed separation is intended to take the form of a tax-free spin-off of the government technology and enterprise information technology services business. The separation transaction is expected to occur in the latter half of calendar year 2013, subject to final approval of the board of directors and certain other conditions. The separation transaction is not expected to require a vote of the stockholders of SAIC.

Management is continuing to develop detailed plans on capital structure, management, governance and other significant matters. In addition, the completion of any separation transaction will be subject to certain customary conditions, including implementation of intercompany agreements, filing of required documents with the U.S. Securities and Exchange Commission and receipt of an opinion from tax counsel and a ruling from the Internal Revenue Service (IRS) as to the tax-free nature of such a transaction. Although we expect that the separation of our businesses, if consummated, would be completed in the latter half of calendar year 2013, there can be no assurance that a separation will ultimately occur. Upon completion of the separation transaction, the operating results of the separated business will be included in discontinued operations. See "Part II, Item 1A-Risk Factors" contained in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2012 for certain risk factors relating to the proposed separation transaction.

Business Environment and Trends

In fiscal 2012, we generated over 90% of our total revenues from contracts with the U.S. Government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. Government. Revenues under contracts with the DoD, including subcontracts under which the DoD is the ultimate purchaser, represented approximately 75% of our total revenues in fiscal 2012. Accordingly, our business performance is subject to changes in the overall level of U.S. Government spending, especially national security, including defense, homeland security, and intelligence spending, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. Government.

While we believe that national security, including defense, homeland security, and intelligence spending will continue to be a priority, the U.S. Government deficit and budget situation has created increasing pressure to examine and reduce spending in these areas. In August 2011, President Obama signed into law the Budget Control Act of 2011, which increased the U.S. Government's debt ceiling and enacted 10-year discretionary spending caps expected to generate over $1 trillion in savings

for the U.S. Government. According to the Office of Management and Budget, these savings include $487 billion in DoD baseline spending reductions over the next 10 years. The Budget Control Act of 2011 also established a joint bipartisan committee of Congress responsible to recommend at least $1.2 trillion in additional savings by November 2011. The joint committee did not meet the deadline for proposing recommended legislation. Unless the Budget Control Act of 2011 is amended, additional automatic spending cuts (referred to as sequestration) totaling $1.2 trillion over nine years will be triggered. Assuming approximately $200 billion in reduced debt-service costs, these discretionary spending cuts are expected to be evenly split between defense and non-defense areas, reducing spending for each area by approximately $500 billion over a nine-year period, beginning in the government fiscal year ending September 30, 2013 (GFY13). In September 2012, the Office of Management and Budget delivered to Congress a report detailing how sequestration would be implemented. While the report included estimated GFY13 reductions by discretionary budget account, it failed to describe how reductions would occur at levels below the account level (i.e., at the project, program and activity level). As a result, there remains significant uncertainty about how the federal government would implement sequestration, currently set to begin in January 2013. Following the November 2012 elections, while the possibility of sequestration, as well as scheduled tax expirations, and other issues associated with the "fiscal cliff" continues to be the top priority for the Obama Administration and Congress, we cannot predict the outcome of any ongoing discussions to address these matters. We continue to evaluate the potential impact of possible sequestration on our business, and while the ultimate effect on our business is uncertain, the amount and nature of these federal budget spending reductions could adversely impact our operations, future revenues and growth prospects in those markets.

A U.S. Government budget for GFY13 has not been passed by Congress. Instead, Congress passed, and the President signed, a six-month continuing resolution funding the U.S. Government through March 31, 2013. While the continuing resolution averts a government shutdown and removes GFY13 funding as a major issue to be solved during the current lame duck session of Congress, it also contains standard restrictions, including no new program starts and no program increases beyond current service levels which could limit our ability to grow our business. We continue to evaluate the ongoing GFY13 budget negotiations, including the potential deferral or prevention of sequestration, and the possible impact on our operations, future revenues and growth prospects.

Competition for contracts with the U.S. Government continues to be intense. The U.S. Government has increasingly used contracting processes that give it the ability to select multiple winners or pre-qualify certain contractors to provide various services or products at established general terms and conditions. Such processes include purchasing services and solutions using indefinite-delivery/indefinite-quantity (IDIQ) and U.S. General Services Administration (GSA) contract vehicles. This trend has served to increase competition for U.S. Government contracts. For more information on these risks and uncertainties, see "Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012, as updated through our subsequent quarterly reports on Form 10-Q.

Reportable Segments

Our business is aligned into four reportable segments: Defense Solutions; Health, Energy and Civil Solutions; Intelligence and Cybersecurity Solutions; and Corporate and Other. For additional information regarding our reportable segments, see Note 9 of the combined notes to the condensed consolidated financial statements for the three and nine months ended October 31, 2012 contained in this Quarterly Report on Form 10-Q, and "Business" in Part I and Note 15 of the combined notes to consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

Key Financial Metrics

Bookings and Backlog. We received net bookings worth an estimated $4.8 billion and $9.1 billion during the three and nine months ended October 31, 2012, respectively. Net bookings represent the estimated amount of revenues to be earned in the future from funded and unfunded contract awards that were received during the period, net of any adjustments to previously awarded backlog amounts. We calculate net bookings as the period's ending backlog plus the period's revenues less the prior period's ending backlog and less the backlog obtained in acquisitions during the period.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed and excludes contract awards which have been protested by competitors. We segregate our backlog into two categories as follows:

• Funded Backlog. Funded backlog for contracts with government agencies primarily represents contracts for which funding is appropriated less revenues previously recognized on these contracts, and does not include the unfunded portion of contracts where funding is incrementally appropriated or authorized on a quarterly or annual basis by the U.S. Government and other customers, even though the contract may call for performance over a number of years. Funded backlog for contracts with non-government agencies represents the estimated value on contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts.

• Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenues to be earned in the future from (1) negotiated contracts for which funding has not been appropriated or otherwise authorized and
(2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedule, or other master agreement contract vehicles.

The estimated value of our total backlog as of the dates presented was as follows:

                                             October 31,      July 31,       April 30,       January 31,
                                                    2012          2012            2012              2012
                                                                   (in millions)
Defense Solutions:
Funded backlog                             $       2,174     $   2,013     $     2,026     $       2,143
Negotiated unfunded backlog                        4,563         4,309           4,605             4,961
Total Defense Solutions backlog            $       6,737     $   6,322     $     6,631     $       7,104
Health, Energy and Civil Solutions:
Funded backlog                             $       1,842     $   1,858     $     1,911     $       2,057
Negotiated unfunded backlog                        2,854         2,865           3,061             3,238
Total Health, Energy and Civil Solutions
backlog                                    $       4,696     $   4,723     $     4,972     $       5,295
Intelligence and Cybersecurity
Solutions:
Funded backlog                             $       1,705     $   1,615     $     1,752     $       1,317
Negotiated unfunded backlog                        5,440         3,867           3,880             4,169
Total Intelligence and Cybersecurity
Solutions backlog                          $       7,145     $   5,482     $     5,632     $       5,486
Total:
Funded backlog                             $       5,721     $   5,486     $     5,689     $       5,517
Negotiated unfunded backlog                       12,857        11,041          11,546            12,368
Total backlog                              $      18,578     $  16,527     $    17,235     $      17,885

Total backlog fluctuates from period to period depending on our success rate in winning contracts and the timing of contract awards, renewals, modifications and cancellations. Contract awards continue to be negatively impacted by on-going industry-wide delays in procurement decisions, which have resulted in an increase in the value of our submitted proposals awaiting decision. Backlog may also be negatively impacted by possible sequestration by the U.S. Government as discussed in "Business Environment and Trends" in this Quarterly Report on Form 10-Q.

We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract at any time. In addition, certain contracts with commercial customers include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed.

Contract Types. Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract. For additional information regarding the types of contracts under which we generate revenues, see "Business-Contract Types" in Part I of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012. The following table summarizes revenues by contract type as a percentage of total revenues for the periods presented:

                                                                Nine Months Ended October 31
                                                               2012                     2011
Cost-reimbursement                                               42 %                     45 %
Time and materials (T&M) and
fixed-price-level-of-effort (FP-LOE)                             29                       30
Firm-fixed price (FFP)                                           29                       25
Total                                                           100 %                    100 %

The increase in the percentage of revenues generated from FFP contracts during the nine months ended October 31, 2012 as compared to the same period of the prior year was primarily due to increased revenues from increased deliveries under certain logistics, readiness and sustainment contracts, increased design and construction services and increased activity on a program to operate and maintain the enterprise network IT infrastructure for the U.S. Department of State.

Revenue Mix. We generate revenues under our contracts from (1) the efforts of our technical staff, which we refer to as labor-related revenues, and (2) the materials provided on a contract and efforts of our subcontractors, which we refer to as

M&S revenues. M&S revenues are generated primarily from large, multi-year systems integration contracts and contracts in our logistics, readiness and sustainment business area, as well as through sales of our proprietary products, such as our border, port and mobile security products and our checked baggage explosive detection systems. While our proprietary products are more profitable, these products represent a small percentage of our M&S revenues and the majority of our M&S revenues generally have lower margins than our labor-related revenues. The following table presents changes in labor-related revenues and M&S revenues for the periods presented:

                                              Three Months Ended October 31                  Nine Months Ended October 31
                                                             Percent                                      Percent
                                               2012           change          2011           2012          change         2011
                                                                        (dollars in millions)
Labor-related revenues                  $     1,562                1 %     $ 1,546      $   4,558              -  %    $ 4,570
As a percentage of revenues                      54 %                           55 %           54 %                         57 %
M&S revenues                                  1,308                5         1,244          3,904              13        3,456
As a percentage of revenues                      46 %                           45 %           46 %                         43 %

In recent years, there have been increases in the relative proportion of M&S revenues as compared to labor-related revenues primarily due to increased activity as a prime contractor on large programs involving significant subcontracted efforts and increased volume of material deliveries under certain programs, primarily with DoD customers.

Results of Operations

The following table summarizes our results of operations for the periods
presented:



                                              Three Months Ended October 31                  Nine Months Ended October 31
                                                            Percent                                         Percent
                                               2012          change         2011             2012            change         2011
                                                                          (dollars in millions)
Revenues                                 $    2,870               3 %    $ 2,790       $    8,462                 5 %    $ 8,026
Cost of revenues                              2,509               1        2,477            7,429                 5        7,051
Selling, general and administrative
expenses (SG&A):
General and administrative (G&A)                103             (62 )        269              248               (36 )        386
Bid and proposal (B&P)                           37              (3 )         38              132                16          114
Internal research and development
(IR&D)                                           17             (35 )         26               49               (21 )         62
Separation transaction expenses                  11             100            -               15               100            -
                                         -- ------- ---                  - ----- ---   -- ------- ---                    - ----- --
Operating income (loss)                         193           1,065          (20 )            589                43          413
Operating income margin                         6.7 %                       (0.7 )%           7.0 %                          5.1 %
Non-operating expense, net                      (16 )                        (29 )            (59 )                          (79 )
                                         -- ------- ---                  - ----- ---   -- ------- ---                    - ----- --
Income (loss) from continuing
operations before income taxes                  177             461          (49 )            530                59          334
Provision for income taxes                      (65 )            51          (43 )           (193 )               3         (188 )
                                         -- ------- ---                  - ----- ---   -- ------- ---                    - ----- --
Income (loss) from continuing
operations                                      112             222          (92 )            337               131          146
Income from discontinued operations,
net of tax                                       -                             3                2                             74
                                         -- ------- ---                  - ----- ---   -- ------- ---                    - ----- --
Net income (loss)                        $      112             226      $   (89 )     $      339                54      $   220
                                         -- ------- ---                  - ----- ---   -- ------- ---                    - ----- --

We classify indirect costs incurred within or allocated to our government customers as overhead (included in cost of revenues) and G&A expenses in the . . .