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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File No.: 1-4850

		COMPUTER SCIENCES CORPORATION
		(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (310) 615-0311

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12B-2).    Yes  x    No  ¨

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

As of September 30, 2005 the aggregate market value of stock held by non-affiliates of the Registrant was approximately $8,725,000,000.

There were 187,814,080 shares of the Registrant’s common stock outstanding as of May 12, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2006 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2006, are incorporated by reference into Part III hereof.

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PART I

Item 1. Business

INTRODUCTION AND HISTORY

General

Computer Sciences Corporation (CSC or the Company) is one of the world leaders in the information technology (I/T) and professional services industry. Since it was founded in 1959, the Company has helped clients use I/T more efficiently in order to improve their operations and profitability, achieve business results and focus on core competencies.

CSC offers a broad array of services to clients in the Global Commercial and government markets and specializes in the application of complex I/T to achieve its customers’ strategic objectives. Its service offerings include information technology and business process outsourcing, and I/T and professional services.

Outsourcing involves operating all or a portion of a customer’s technology infrastructure, including systems analysis, applications development, network operations, desktop computing and data center management. CSC also provides business process outsourcing, managing key functions for clients, such as procurement and supply chain, call centers and customer relationship management, credit services, claims processing and logistics.

I/T and professional services include systems integration, consulting and other professional services. Systems integration encompasses designing, developing, implementing and integrating complete information systems. Consulting and professional services includes advising clients on the strategic acquisition and utilization of I/T and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering.

The Company also licenses sophisticated software systems for the financial services markets and provides a broad array of end-to-end e-business solutions that meet the needs of large commercial and government clients. The Company focuses on delivering results by combining business innovation skills with seasoned delivery expertise to provide flexible and scalable solutions. To do so, CSC draws on its vast experience in designing, building and maintaining large, complex, mission-critical systems and applies this knowledge to today’s business challenges.

CSC does not have exclusive agreements with hardware or software providers and believes this vendor neutrality enables it to better identify and manage solutions specifically tailored to each client’s needs.

Major Markets

CSC provides its services to clients in Global Commercial industries and to the U.S. federal government. Segment and geographic information is included in Note 14 to the Company’s consolidated financial statements for the year ended March 31, 2006.

In the Global Commercial market sector, CSC’s service offerings are delivered to clients in a wide array of industries including aerospace/defense, automotive, chemical and energy, consumer goods, financial services, healthcare, manufacturing, retail/distribution, telecommunications, and utilities. The Company’s Global Commercial market sector also includes U.S. state and local and foreign government clients.

The Company has provided I/T services to the U.S. federal government since 1961, is a leading federal contractor and is one of its top I/T service providers. CSC serves a broad federal customer base, including most civil departments and branches of the military, as well as the Department of Homeland Security. The Company

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provides a broad spectrum of services to the U.S. federal government, ranging from traditional systems integration and outsourcing to complex project management and technical services. Key offerings include enterprise modernization, telecommunications and networking, managed services, base and range operations, and training and simulation.

Geographically, CSC has major operations throughout North America, Europe and the Asia-Pacific region, including India.

During the last three fiscal years, the Company’s revenue mix by major markets was as follows:

Fiscal 2006 Overview

During fiscal 2006, CSC announced awards valued at approximately $12.1 billion, including $5.0 billion of Global Commercial awards and $7.1 billion with the U.S. federal government. These multi-year awards represent the estimated value of the Company’s portion at contract signing. They cannot be considered firm orders, however, due to their variable attributes, including demand-driven usage, modifications in scope of work due to changing customer requirements, annual funding constraints and indefinite delivery/indefinite quantity characteristics of major portions of the Company’s U.S. Federal activities.

As mentioned in last year’s Form 10-K, during April 2005 CSC exchanged the Company’s Health Plans Solutions (HPS) operations along with cash for CSC common shares. The HPS business is reported as a discontinued operation. For further discussion, please see Note 2 to the consolidated financial statements.

During October 2005 CSC Computer Sciences Corporation International Inc., a wholly owned subsidiary of the Company acquired the remaining interest in Singapore based CSA Holdings Ltd (CSAH). Privatizing CSAH will allow further integration of similar businesses and resources into CSC, resulting in enhanced efficiency and competitiveness through a streamlined cost structure.

During April 2006, the Company announced implementation of a restructuring program expected to positively impact future cash flow and earnings, enhancing shareholder value. The program is designed to streamline CSC’s global operations and increase the use of lower cost resources, and involves workforce reductions during fiscal 2007 and 2008 to address excess capacity in certain geographies. For further discussion, please see Note 16 to the consolidated financial statements.

Global Commercial Market Highlights

Within the Global Commercial market, there were several significant awards to CSC during fiscal 2006. Many of the Company’s awards were extensions and / or expansions of existing relationships, a clear indication of customer satisfaction.

CSC’s largest commercial award during fiscal 2006 was the 7 year and 7 months, $1.9 billion I/T outsourcing services contract extension with DuPont. The agreement further bolsters this long-standing relationship dating back to 1997 when the Company was awarded a 10 year, $4 billion global I/T outsourcing contract—among the Company’s largest I/T services arrangements. CSC will now deliver information systems, technology infrastructure and applications services to DuPont in more than 40 countries through 2014.

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The Company extended its relationship with BAE Systems, a transatlantic defense and aerospace company, through a 5 year, $1.9 billion I/T outsourcing services contract. CSC’s relationship with BAE Systems dates back to 1994 when the two companies entered into a $1.5 billion, 10 year contract in the UK, which was then one of the largest commercial I/T outsourcing contracts awarded to a single supplier in Europe. Under the new agreement, CSC will continue to manage a full range of I/T services in more than 117 BAE locations in the UK and North America.

Following a 7 year and 3 month, $1.6 billion contract extension last fiscal year, the Company again expanded and extended its relationship with General Dynamics through four I/T outsourcing services agreements collectively valued at $260 million. The contracts bring an additional General Dynamics business unit into scope and extend services for three other business units through 2012.

Schroders, a global asset management company, and CSC renewed their I/T outsourcing arrangement. The new $235 million, 7 years and 10 months agreement supersedes the previous 7 year contract awarded to the Company in 2001, with CSC providing midrange, desktop, networks and applications services.

CSC signed a $135 million, 5 year agreement with British Nuclear Group, a business organization within British Nuclear Fuels, the UK’s leading nuclear technology specialist. The arrangement supersedes a previous contract awarded to the Company in 2000, and calls for CSC to manage I/T operations in the UK and to play a significant role in major business change projects implemented by British Nuclear Group.

CSC and Telkom South Africa entered into a 5 year network outsourcing contract with Old Mutual and Nedbank. Old Mutual is the largest financial services group in South Africa and has a majority ownership stake in Nedbank, one of the largest banking groups in South Africa. The Company’s share of the $275 million agreement is estimated to be $125 million, and is incremental to an I/T outsourcing agreement CSC signed with Old Mutual in 1999. Under the terms of the new agreement, the Company will manage and operate networking services including creating a single shared data and voice network.

U.S. Federal Government Market Highlights

There were several significant awards to CSC during fiscal 2006 from the U.S. federal government.

The Company’s largest U.S. federal government award during the fiscal year was the Army Strategic Services Sourcing contract. CSC is one of seven companies selected to provide a comprehensive range of engineering, logistics and business operations services to the U.S. Army Communications-Electronics Life Cycle Management Command under the $19.25 billion arrangement. The Company’s portion of the agreement is estimated to be $1.5 billion for a 5 year base period and one 5 year option.

As part of the MemberHealth Inc. team, CSC was awarded a $384 million, 8 year contract by the Centers for Medicare and Medicaid Services to establish a national prescription drug benefit plan called Community Care Rx in accordance with the Medicare Modernization Act, Part D. The agreement is incremental to the 2004 Drug Discount Card pilot program, and calls for the Company to provide enrollment processing, financial management, call center operations, and compliance management and reporting services.

The U.S. Air Force’s 45^th Space Wing selected a CSC-led joint venture for a 10 year and 5 months, $335 million (if all options are exercised) contract. Under the terms of the agreement, the CSC team will deliver space command operations, maintenance and engineering support to critical launch, spacecraft and ordnance facilities and support systems for unmanned space vehicle launches.

The Company signed a $307 million, 10 year (if all options are exercised) arrangement for CSC to provide maintenance and operation services to the U.S. Air Force Air Education Training Command. Under the terms of the award, the Company will deliver base operating support services, including facilities operation and maintenance; receiving, inventorying and distribution of supplies; fuels management; weather forecasting and reporting; and housing and personnel management to the 81^st Training Wing at Keesler Air Force Base.

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The Department of Defense’s Missile Defense Agency (MDA) awarded the Company a 2 year and 3 months, $243 million (if all options are exercised) contract to continue providing scientific, engineering and technical services. This agreement is incremental to a 3 year contract signed with the MDA in 2002, and calls for the Company to provide program, acquisition and business management; systems engineering; testing and evaluation; program protection; operational status reporting; and site activation.

The National Aeronautics and Space Administration (NASA) Shared Services Center (NSSC) at Stennis Space Center awarded CSC a 10 year, $230 million (if all options are exercised) agreement to provide administrative, financial, human resources and procurement support services. The NSSC is an alliance between CSC, NASA, the states of Mississippi and Louisiana and other team members.

COMPETITION

The I/T and professional services markets in which CSC competes are not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those offered by the Company. Some of these are large industrial firms, including computer manufacturers and major aerospace firms that may have greater financial resources than CSC and, in some cases, may have greater capacity to perform services similar to those provided by the Company.

CSC’s ability to obtain business is dependent upon its ability to offer better strategic concepts and technical solutions, better value, a quicker response, more flexibility or a combination of these factors. In the opinion of the Company’s management, CSC is positioned to compete effectively in the Global Commercial and U.S. federal government markets based on its technology and systems expertise and large project management skills. It is also management’s opinion that CSC’s competitive position is enhanced by the full spectrum of I/T and professional services it provides, from consulting to software and systems design, implementation and integration, to information technology and business process outsourcing to technical services, delivered to a broad commercial and government customer base.

EMPLOYEES

The Company has offices worldwide, and as of March 31, 2006 employed approximately 79,000 persons. The services provided by CSC require proficiency in many fields, such as computer sciences, programming, mathematics, physics, engineering, astronomy, geology, operations, research, economics, statistics and business administration.

U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS

All of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (SEC) on or after January 19, 1995 are available free of charge through the Company’s Internet website, www.csc.com, as soon as reasonably practical after the Company has electronically filed such material with, or furnished it to, the SEC.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

All statements and assumptions contained in this Annual Report and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

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Forward-looking information contained in these statements include, among other things, statements with respect to CSC’s financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of CSC’s control, which could cause actual results to differ materially from the results described in such statements. These factors include without limitation those listed below under Item 1A. Risk Factors.

Forward-looking statements in this Annual Report speak only as of the date of this Annual Report, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. CSC does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events, except as required by law.

Item 1A. Risk Factors

Past performance may not be a reliable indicator of future financial performance. Future performance and historical trends may be adversely affected by the following factors, as well as other variables, and should not be relied upon to project future period results.

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Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Upon expiration of its leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Lease expiration dates range from fiscal 2007 through 2018.

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Item 3. Legal Proceedings

The Company is currently party to a number of disputes which involve or may involve litigation.

CSC is engaged in providing services under contracts with the U.S. Government. The contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether the Company’s operations are being conducted in accordance with these requirements. U.S. Government investigations of the Company, whether related to the Company’s federal government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon the Company, or could lead to suspension or debarment from future U.S. Government contracting. The Company believes it has adequately provided for any losses we may experience from these investigations.

In the course of business, discrepancies or claims may arise as to the use or reliability of various software products provided by the Company for its customers. On February 11, 2005, the Company was named, along with other vendors to the insurance industry, and dozens of insurance companies in Hensley, et al. vs. Computer Sciences Corporation, et al., filed as a putative nationwide class action in state court in Miller County, Arkansas shortly before President Bush signed the Class Action Fairness Act into law. The plaintiffs allege the defendants conspired to wrongfully use software products licensed by the Company and the other software vendors to reduce the amount paid to the licensees’ insureds for bodily injury claims. Plaintiffs also allege wrongful concealment of the manner in which these software programs evaluate claims and wrongful concealment of information about alleged inherent errors and flaws in the software. Plaintiffs seek injunctive and monetary relief of less than $75,000 for each class member, as well as attorney’s fees and costs. The Company intends to defend itself vigorously against the allegations.

Litigation is inherently uncertain and it is not possible to predict the ultimate outcome of the matters discussed above. Considering the early stage of the Hensley case, the complicated issues presented by that matter, and the fact that no class has been certified, it is not possible at this time to make meaningful estimates of the amount or range of loss that could result from this matter. It is possible that the Company’s business, financial condition, results of operations, or cash flows could be affected by the resolution of this matter. Whether any losses, damages or remedies ultimately resulting from this proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages, if any, and the structure and type of any such remedies. Depending on the ultimate resolution of these matters, some may be material to the Company’s operating results for a particular period if an unfavorable outcome results, although such a material unfavorable result is not presently expected, and all other litigation, in the aggregate, is not expected to result in a material adverse impact to the consolidated financial statements.

As reflected by Form 8-K filings made by Sears Holdings Corporation (SHC) on May 13, 2005 (following merger with K-Mart Holding Corporation), and by the Company on May 16, 2005, SHC’s subsidiary, Sears, Roebuck and Co. (Sears), and the Company are in dispute over applicable termination fees following Sears’ termination of its Master Services Agreement (Agreement) with the Company on May 11, 2005. The dispute, which also involves some billings for continuing services, is expected to be resolved pursuant to scheduled negotiations or impending legal and arbitration proceedings. As of March 31, 2006, the Company had invested in net assets associated with the Agreement, including accounts receivable, prepaid expenses, software, property, plant and equipment, as well as other commitments. In addition to the above, the Company’s assets include $37 million of net outsourcing contract costs. The Company will vigorously pursue recovery for its associated assets and commitments. While the Company expects full recovery of its investments associated with this Agreement, if unsuccessful, the Company may experience a charge, which could be material, associated with the impairment of these assets.

The Company has submitted 16 Requests for Equitable Adjustment (REAs) totaling in excess of $900 million on two U.S. Federal contracts. Included in current assets on the Company’s balance sheet is

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approximately $770 million of unbilled accounts receivable and deferred costs related to the contracts. CSC has requested payment for certain related out-of-scope work directed or caused by the customers in support of their critical missions. The contractual modification process for scope changes has lagged behind the need for CSC to provide critical on-going operational support. The Company does not record any profit element when it defers costs associated with such REAs. We believe we have a legal basis for pursuing recovery of these REAs and that collection is probable. Settlement of the amounts depends on individual circumstances and negotiations with the parties and we are unable to predict the timing of resolution of the REAs.

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

None.

Executive Officers of the Registrant

Business Experience of Officers

Van B. Honeycutt joined the Company in 1975. He was elected Chief Executive Officer in April 1995, and Chairman of the Board of Directors in March 1997. He has been a director of the Company since 1993. Previous positions within the Company include President and Chief Operating Officer (1993-1995), President of the Industry Services Group (1988-1993), and President of CSC Credit Services, Inc. (1983-1988).

Michael W. Laphen joined the Company in 1977 and was elected President and Chief Operating Officer in April 2003 and Vice President in August 2001. He was President of the European Group from August 2000 to March 2003. Previous positions within the Company include President of the Federal Sector—Civil Group (1998-2000), and President of Systems Group—Integrated Systems Division (1992-1998).

Michael E. Keane joined the Company in 2005 as Vice President—Finance and was elected Vice President and Chief Financial Officer in 2006. Former positions include Senior Vice President and Chief Financial Officer of UNOVA, Inc. (1997-2005), and Senior Vice President and Chief Financial Officer of Western Atlas Inc (1996-1997).

Leon J. Level joined the Company in 1989 as Vice President and Chief Financial Officer and as a member of CSC’s Board of Directors. Former positions include Vice President and Treasurer of Unisys Corporation and Chairman of Unisys Finance Corporation; Assistant Corporate Controller and Executive Director of The Bendix Corporation; and Principal with the public accounting firm of Deloitte & Touche LLP.

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Harvey N. Bernstein joined the Company as Assistant General Counsel in 1983. He became Vice President, Global Legal Compliance and Assistant Secretary in 2003 after being elected a Vice President in 1988 and thereafter serving as Deputy General Counsel and Assistant Secretary. Prior to joining the Company, he specialized in government procurement law at the firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C.

Donald G. DeBuck joined the Company in 1979 and was elected Vice President and Controller in August 2001. Previous positions within the Company include Assistant Controller (1998-2001) and Vice President of Finance and Administration, Communications Industry Services (1996-1998).

Hayward D. Fisk joined the Company in 1989 as Vice President, General Counsel and Secretary. Prior to joining the Company, he was associated for 21 years with Sprint Corporation (formerly United Telecommunications, Inc.), in various legal and executive officer positions, most recently as Vice President and Associate General Counsel.

Thomas R. Irvin joined the Company as Assistant Treasurer in 1987 and was elected Vice President and Treasurer in November 2004. Prior to joining the Company, he held various financial and engineering positions with Ni-Cal Development Corporation, Raytheon and Dravo Corporation.

Paul T. Tucker joined the Company in 1996 as a Corporate Development executive, and in August 1997 was elected Vice President of Corporate Development. From 1990 to 1995 he was President and Chief Executive Officer of Knight-Ridder Financial, an electronic real-time financial market information company. Previously, he founded and served as President and Chief Technologist of HAL Communications Corp., a communications hardware and software company and was an Associate Professor and Senior Research Engineer at the University of Illinois.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Holders

Common stock of Computer Sciences Corporation is listed and traded on the New York Stock Exchange under the ticker symbol “CSC.”

As of May 12, 2006 the number of registered shareholders of Computer Sciences Corporation’s common stock was 8,736. The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the New York Stock Exchange for each quarter during the last two calendar years and through May 17, 2005.

It has been the Company’s policy to invest earnings in the growth of the Company rather than distribute earnings as dividends. This policy, under which dividends have not been paid since fiscal 1969, is expected to continue, but is subject to regular review by the Board of Directors. Under the Company’s most restrictive covenant requirement, $5,042.1 million of retained earnings was available for cash dividends at March 31, 2006.

(b) Purchases of Equity Securities

The following table provides information on a monthly basis for the fourth quarter ended March 31, 2006 with respect to the Company’s purchases of equity securities.

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Item 6. Selected Financial Data

COMPUTER SCIENCES CORPORATION

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Five-Year Review (Continued)

Notes:

Fiscal 2006 special items represent charges related to the termination, per an agreement made with Nortel Networks, of the Company’s services for certain information technology outsourcing activities, see Note 6 to the consolidated financial statements. Fiscal 2005 special items represent charges related to the early retirement of debt. Fiscal 2004, 2003 and 2002 special items relate to items associated with exit and disposal activities.

No dividends were paid by CSC during the five years presented.

Operating results for fiscal 2004, fiscal 2003, and fiscal 2002 have been restated to conform to the current presentation with regard to the Company’s reporting of certain activities which were sold or classified as available for sale during 2005 as discontinued operations, see Note 2 to the consolidated financial statements.

The consolidated financial statements included in Item 8 of this Annual Report present income from discontinued operations, the gain on sale of discontinued operations, and the cumulative effect of a change in accounting principle.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The following discussion and analysis provides information management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (CSC or the Company). The discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended March 31, 2006. There are three primary objectives of this discussion:

To achieve these objectives, the discussion is presented in the following sections:

Overview—includes a brief description of the business and how it earns revenue and generates cash, as well as a discussion of the key business drivers, economic and industry factors, fiscal 2006 highlights and fiscal 2007 commentary.

Results of Operations—discusses year-over-year changes to operating results for fiscal 2004 to 2006, describing the factors affecting revenue on a consolidated and reporting segment basis, including new contracts, acquisitions and currency impacts, and also by describing the factors affecting changes in the major cost and expense categories.

Financial Condition—discusses causes of changes in cash flows and describes the Company’s liquidity position and available capital resources.

Critical Accounting Estimates—discusses accounting policies that require critical judgments and estimates.

OVERVIEW

The Company’s primary service offerings are outsourcing and I/T and professional services. Outsourcing activities include operating all or a portion of a customer’s technology infrastructure and applications, and business process outsourcing. I/T and professional services include systems integration, consulting and other professional services and software systems sales and related services. CSC provides these services to customers in the Global Commercial and U.S. federal government markets. On a geographic basis, CSC provides services to Global Commercial customers in the United States, Europe and other international locations. Operations in Australia, Asia and Canada generate substantially all revenue within Other International.

Economic and Industry Factors

Global Commercial markets are affected by various economic and industry factors. The economic environment in the regions CSC serves will impact customers’ decisions for discretionary spending on I/T projects. CSC is in a highly competitive industry which exerts downward pressure on pricing and requires companies to continually seek ways to differentiate themselves through several factors, including service offerings and flexibility. Management monitors industry factors including relative market shares, growth rates, billing rates, staff utilization rates and margins as well as macroeconomic indicators such as interest rates, inflation rates and foreign currency rates.

The U.S. federal market is also highly competitive and has unique characteristics. All U.S. government contracts and subcontracts may be modified, curtailed or terminated at the convenience of the government if program requirements or budgetary constraints change. In the event that a contract is terminated for convenience, the Company generally is reimbursed for its allowable costs through the date of termination and is paid a proportionate amount of the stipulated profit or fee attributable to the work performed. Shifting priorities of

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the U.S. government can also impact the future of projects. The Company recognized the U.S. government’s increased priorities on defense and homeland security programs and has focused business development efforts in these areas. Management monitors government priorities and industry factors through numerous industry and government publications and forecasts, legislative activity, budgeting and appropriation processes and by participating in industry professional associations.

Business Drivers

Revenue is generated by providing services on a variety of contract vehicles lasting from less than six months to 10 years or more. Factors affecting revenue include:

Earnings are driven by the above revenue factors, in addition to the following:

Cash flows are impacted by the above earnings factors, in addition to other factors including the following:

Key Performance Indicators

The Company manages and assesses the performance of its business through various means, with the primary financial measures including new contract wins, revenue growth, margins, cash flow and return on investment.

New contract wins—In addition to being a primary driver of future revenue, focusing on new contract wins also provides management an assessment of the Company’s ability to compete. The total level of wins tends to fluctuate from year to year depending on the timing of new and recompeted contracts as well as numerous external factors. CSC employs stringent financial and operational reviews and discipline in the new contract process to evaluate risks and generate appropriate margins and returns from new contracts.

Revenue growth—Year-over-year revenues tend to vary less than new contract wins, and reflect performance on both new and existing contracts. With a wide array of services offered, the Company is able to pursue additional work from existing customers. In addition, incremental increases in revenue will not necessarily result in linear increases in costs, particularly overhead and other indirect costs, thus potentially improving profit margins. Foreign currency fluctuations also impact revenue growth.

Margins—Margins reflect the Company’s performance on contracts and ability to control costs. While the ratios of various cost elements as a percentage of revenue can shift as a result of acquisitions or dispositions of

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business with different cost profiles, a focus on maintaining and improving overall margins leads to improved efficiencies and profitability. Although the majority of the Company’s costs are denominated in the same currency as revenues, increased use of offshore support also exposes CSC to additional margin fluctuations.

Cash flow—Over time the primary drivers of the Company’s cash flow are earnings provided by the Company’s operations and the use of capital to generate those earnings. Also contributing to short term cash flow results are movements in current asset and liability balances. The Company also regularly reviews the U.S. Generally Accepted Accounting Principles (GAAP) cash flow measurements of operating, investing and financing cash flows, as well as non-GAAP free cash flow.

Return on investment (ROI)—ROI is an effective indicator combining a focus on margins with efficient and productive net asset utilization. A combination of strong margins (measuring how efficiently profit is generated from revenue) and investment base turnover (measuring how effectively revenue is generated from investors’ capital) is required to generate sufficient returns on capital. Strong working capital management also serves to minimize investment capital and increase returns.

Readers should be cautioned that DSO, free cash flow and ROI are not GAAP measures, and the Company’s definition of such measures may differ from other companies. Therefore, such measures may not be comparable to those of other companies. CSC calculates DSO as follows: Total receivables at quarter-end divided by revenue-per-day. Revenue-per-day equals total revenues for the quarter divided by the number of days in the fiscal quarter. Free cash flow is equal to the sum of 1) operating cash flows, 2) investing cash flows, excluding business acquisitions and dispositions, purchase or sale of available for sale securities and 3) capital lease payments. ROI is calculated by multiplying profit margin times investment base turnover. The profit margin used is profit before interest and special items and after tax divided by revenues. Investment base turnover equals revenues divided by average debt and equity.

Fiscal 2006 Highlights

Significant events during fiscal 2006 include:

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The Company’s significant wins in fiscal 2006 included the following:

Global Commercial:

U.S. Federal:

These multi-year awards represent the estimated value of the Company’s portion at contract signing. They cannot be considered firm orders, however, due to their variable attributes, including demand-driven usage, modifications in scope of work due to changing customer requirements, annual funding constraints and indefinite delivery/indefinite quantity characteristics of major portions of the Company’s U.S. Federal activities.

Revenue growth in the Global Commercial sector was the result of recent years’ significant contract wins. U.S. Federal sector wins have also been strong, particularly in the Department of Defense service area. Currency shifts during the year unfavorably impacted revenue. The Company’s growth has created a broad, long-term global revenue base across numerous customers, industries, geographic regions and service offerings. Approximately 80% of CSC’s revenues come from long-term contracts including Global Commercial outsourcing and U.S. federal government engagements.

An increase in investment in working capital as the result of contracts awarded during fiscal 2005 reduced cash flow from operations during fiscal 2006. These increases in working capital were anticipated and were financed from current cash flows enabling the Company to maintain the debt to capitalization ratio at the reduced levels achieved in fiscal 2005. Cash out flow for investing activities, adjusted for the disposition of DynCorp International, declined from prior year as a result of lower levels of investment in outsourcing contracts, equipment and software.

Fiscal 2007 Commentary

As a leading federal contractor and one of the top I/T service providers to the U.S. federal government, CSC’s U.S. Federal sector is well-positioned to benefit from anticipated growing demand. The U.S. federal

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government is one of the world’s largest I/T services consumers, and its spending is expected to continue to increase during the upcoming year in order to improve technologies in the areas of defense, homeland security and civil agency modernization. While the ultimate distribution of U.S. federal funds and project assignments can vary, the Company expects its broad I/T and outsourcing capabilities to be viewed favorably by the U.S. federal government.

The Company’s major pursuits in the global commercial market during fiscal 2006 focused on the renewal and extension of major global outsourcing contracts with such efforts rewarded by the DuPont and BAE Systems awards as well as Schroders, British Nuclear Group and General Dynamics extensions or expansions noted above. In addition, the Company has been and will continue to be selective in new business pursuit opportunities given the focus on margin expansion and increasing return on investment. With respect to discretionary spending and project work, Central and Southern Europe continue to show areas of soft demand while North American demand for consulting and systems integration is strengthening, although price pressures continue. While the future demand for outsourcing services is not known with certainty, the long-term nature of major outsourcing engagements allows CSC to benefit from a certain level of continuity. Growth during fiscal 2007 in Global Commercial revenue from new business awarded during fiscal 2006 and 2005 is expected to be tempered by the termination or reduction in scope of a few significant outsourcing engagements and reduced rates of recovery on renewed engagements. During fiscal 2006, the Company’s Global Commercial segment’s revenue was unfavorably impacted by currency fluctuations in Europe and Other International regions. The Company cannot forecast with certainty future movement in currency exchange rates or its impact on operating results.

Other trends the Company expects for fiscal 2007 are as follows:

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The Company’s overall short-term financial objectives include:

The Company’s primary long-term objective is to continue developing and obtaining the core capabilities and differentiating factors that will enable CSC to compete effectively in both the Federal and Global Commercial markets. The Company will continue to evaluate strategic opportunities that enhance its core capabilities and review its portfolio of business operations for overall strategic fit. Continued long-term revenue and earnings growth will come from the combination of internal growth and acquisitions.

Subsequent to fiscal 2006 year-end, the Company announced a response to recent expressions of interest, and stated that CSC’s Board of Directors has decided to explore strategic alternatives to enhance shareholder value, including a potential sale of the Company. There can be no assurance the exploration of strategic alternatives will result in a transaction, and the Company does not intend to disclose developments regarding its exploration unless and until the Board of Directors has reached a conclusion. During the period in which uncertainty exists as to the future direction the Company takes, demand for the Company’s services could be adversely impacted.

In April 2006, the Company announced a restructuring plan which will be carried out during fiscal 2007 and 2008. The objectives of the plan are to 1) streamline CSC’s worldwide operation and 2) leverage the increased use of lower cost resources. Workforce reductions of approximately 4,300 and 700 employees are planned for fiscal 2007 and 2008, respectively, which will result in associated estimated pre-tax restructuring charges of $375 million. Restructuring charges will consist predominantly of severance and related employee payments resulting from terminations. In addition, the Company will evaluate facility requirements as a result of the headcount reductions and certain charges could occur from early lease cancellations or ceasing use of facility space.

A majority of the planned workforce reductions (2,600 in fiscal 2007 and 50 in 2008) will take place in Europe. Approximately 1,300 and 500 heads will be reduced in North America in fiscal 2007 and 2008, respectively, with the balance in Australia and Asia. Partially offsetting the reductions will be headcount increases in certain lower cost regions of approximately 1,600 and 400 employees in fiscal 2007 and 2008, respectively. As a result of the restructuring, the Company expects total pre-tax savings of approximately $150 million in fiscal 2007 and $300 million in fiscal 2008, net of the new costs from headcount increases in the lower cost regions. While the impact on specific cost elements cannot yet be determined, future costs of services and selling, general and administrative expenses are expected to represent a lower percentage of revenues as a result of the overall lower cost structure.

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RESULTS OF OPERATIONS

Revenues

Revenues for the Global Commercial and U.S. Federal sector segments (see Note 14 to the consolidated financial statements) for fiscal 2006, fiscal 2005 and fiscal 2004 are as follows:

The major factors affecting the percent change in revenues are presented as follows:

Fiscal 2006 revenue growth from significant new commercial engagements and Federal programs offset the impact of 1) terminated commercial contracts with Nortel Networks and JPMorgan Chase, 2) revised billing rates for extended contracts, 3) reduced scope on certain Federal programs and 4) wind down of the development phase on a significant government project. Global Commercial growth for fiscal 2006 of 1.9% (3.2% in constant currency) was led by U.S. Commercial operations where new outsourcing engagements, growth on existing outsourcing engagements and growth in the U.S. consulting and systems integration business offset terminated engagements and lower billing rates on extended engagements. Other International operations benefited from growth on existing business. Europe operations, in constant currency, were unchanged from the prior year. The U.S. Federal sector revenue growth benefited from contracts awarded during fiscal 2006 and 2005 and from growth on existing programs offsetting the effects of programs with reduced scopes as noted above.

For fiscal 2005 revenue performance versus fiscal 2004, the impact of significant new commercial engagements offset the impact of the completion, reduced scope or de-consolidation of a small number of

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significant Federal programs. Global Commercial growth for fiscal 2005 of 10.8% (6.4% in constant currency) was led by the European region, where new outsourcing engagements offset continued weak demand for consulting and systems integration. U.S. operations also benefited from major contract wins but additionally saw modest growth in consulting and systems integration revenue. In the U.S. Federal sector, the impact of $7.0 billion of announced contract awards did not offset revenue declines on certain programs, and fiscal 2005 revenue declined 6.2% to $4.7 billion.

Global Commercial

Revenue from Global Commercial grew 1.9%, 3.2% in constant currency, during fiscal 2006. New major engagements contributed approximately $483 million to Global Commercial’s revenue growth for fiscal 2006. These engagements, although primarily for outsourcing services, include other I/T and professional services. Revenue from existing engagements declined for fiscal 2006 as growth in U.S. consulting and systems integration services and in Other International was offset by lower billing rates on a contract extension, reduced volume on certain contracts, the termination and wind-down of certain contracts such as Nortel Networks, Sears, and JPMorgan Chase and a decline in software license sales.

U.S. Commercial revenues increased $195 million for fiscal 2006, or 5.1%. The growth was primarily from outsourcing contracts awarded during fiscal 2005 and growth in the consulting and systems integration business. New contracts contributing to the growth were Sun, Ascension Health, Textron and Aon when combined, contributed $279 million to revenue growth for fiscal 2006. This revenue growth and the contribution from U.S. consulting and systems integration were partially offset by reduced volumes and billing rates on certain significant outsourcing contracts and the termination of significant outsourcing contracts with Nortel Networks and JPMorgan Chase. The Company’s contract with Sears, Roebuck & Co. for outsourcing services, which was terminated during fiscal 2006, provided $131 million of revenue during fiscal 2006.

Other International revenues increased $133 million or 10.9%, 8.4% in constant currency, during fiscal 2006. Australian operations contributed $62 million of revenue growth attributable to a professional staffing business and a major outsourcing contract, offset somewhat by the termination of an outsourcing contract. Asia contributed $50 million in revenue growth attributable to various outsourcing engagements.

Europe revenues decreased $149 million or 3.4% though were essentially unchanged on a constant currency basis. Growth from new outsourcing and I/T and professional services engagements with U.K. National Health Service, Zurich Financial Services and Renault of $184 million was offset by unfavorable currency movements of approximately $152 million, reduced scope of work on certain outsourcing engagements, reduced billing rates on a contract extension, a decline in software license sales and continued softness in demand for the Company’s consulting and systems integration services in Germany and Italy.

Global Commercial revenue growth was 10.8% for fiscal 2005, or 6.4% in constant currency. New major engagements were the Company’s significant driver of Global Commercial revenue growth, contributing approximately $854 million of fiscal 2005 revenue. These engagements encompass both outsourcing and other I/T and professional services. Announced commercial contract wins totaled $9.0 billion for fiscal 2005 and $9.7 billion for fiscal 2004. Existing base revenues declined somewhat for fiscal 2005, due to normal contract completions and declines as productivity increases are reflected in declining bill rates to clients.

Europe revenues increased $644 million for fiscal 2005, representing 17.5% growth, 9.0% in constant currency. Major new engagements contributing to this performance included the U.K. National Health Service and the European operations of Zurich Financial Services, as well as the full year impact of the fiscal 2004 SAS Group and National Grid Transco contract commencements. Revenue growth attributable to these new engagements of approximately $572 million and favorable currency movement of approximately $310 million were offset by continued weakness in demand for the Company’s consulting and systems integration services in Continental Europe as well as reduced scope on certain existing outsourcing engagements.

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U.S. commercial revenue increased by $258 million or 7.2% for fiscal 2005. This growth is primarily attributable to new fiscal 2005 and 2004 outsourcing contracts with the U.S. operations of Zurich Financial Services, Aon, Ascension Health, Textron and Motorola, with total fiscal 2005 revenue growth impact of approximately $221 million. This impact and slight growth in the Company’s U.S. consulting and systems integration business were offset somewhat by reduced volumes and billing rates on certain major outsourcing contracts.

Other International revenues were up $16.5 million from fiscal 2004, though down 3.6% in constant currency, primarily the result of reduced product sales, including the closure of a product reseller business in Australia. These reductions were offset somewhat by increased outsourcing revenues including the full year effect from the Company’s engagement with Malayan Banking Berhad.

U.S. Federal

The Company’s U.S. Federal sector revenues were derived from the following sources:

U.S Federal sector revenue growth for fiscal 2006 was 8.1% with revenue up $378 million to $5,054 million. The revenue growth was driven by new business awarded during fiscal 2006 and 2005 and increases on existing Department of Defense contracts. This growth was partially offset by the completion of the development phase on a state contract and reduced scope on a small number of significant programs. The U.S. Federal sector continued to win significant new business during fiscal 2006 with announced new U.S. federal contract awards of $7.1 billion versus $7.0 billion for fiscal 2005 and $5.0 billion for fiscal 2004.

Department of Defense revenue increased $459 million or 15.8% to $3,369 million for fiscal 2006. Growth was the result of increased demand for equipment procurement and installation services for the U.S. Army, a new program to provide aviation support services, new tasking on programs to provide logistical support to the U.S. Army, new tasking to provide technical support for the Navy’s undersea test facilities, a multiple award contract to provide professional services to Naval Sea Systems Command, a new program to provide support services for the U.S. Strategic Command and I/T engineering and management services for certain intelligence services. These new programs and tasking provided approximately $297 million in revenue growth for fiscal 2006. The remainder of the revenue increase during fiscal 2006 was the result of normal contract activities including new tasking on various projects and various new programs.

Civil agencies revenue was down $69 million or 4.3% versus fiscal 2005, driven by the reduction in scope for a significant project with the Internal Revenue Service. The impact of the scope reduction on this project was approximately $72 million. New tasking on projects for the National Aeronautics and Space Administration (NASA) offset scope reductions and the completion of other programs.

Work performed by the U.S. Federal sector for state and local governments as well as commercial clients was $141 million for fiscal 2006, down $12 million. The decrease was the result, primarily, of a reduction of effort on a contract with the New York Department of Health. This was offset somewhat by a project with a foreign government to provide information technology services.

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U.S Federal sector revenue for fiscal 2005 of $4,675.9 million was down $307 million or 6.2% compared to fiscal 2004. The revenue decline was driven by the completion, reduced scope or de-consolidation of a small number of significant programs, with a total impact of approximately $446 million. This impact, as well as that of other routine completions and volume reductions, was partially offset by program commencements and increased tasking on other programs.

Department of Defense revenue was down $89 million or 3.0% for fiscal 2005. The completion of and reduced efforts on several logistics contracts for the U.S. Army as well as the de-consolidation of a previously consolidated joint venture due to decreased CSC ownership accounted for approximately $270 million of revenue reduction. Partially offsetting these reductions were new contracts for equipment procurement and installation for the U.S. Army and I/T engineering and management efforts for the intelligence services, new tasking from the Navy for computing equipment support, and a new contract to provide flight simulators to the U.S. Army. These increases totaled approximately $230 million. The net impact of other normal contract activities—start-ups, completions, increased and decreased volumes—accounted for the remaining change in revenue.

Civil agencies revenue was down $190 million or 10.6% versus fiscal 2004, driven by the completion of significant projects with NASA and the Federal Bureau of Investigation. The impact of these completions was approximately $176 million. Scope reductions on other programs were partially offset by revenue from new contracts, including a program with the Department of Health and Human Services.

Work performed by the U.S. Federal sector for state and local governments as well as commercial clients was $153 million for fiscal 2005, down $28 million. The decrease was driven primarily by a decline in development work on a contract with the New York Department of Health as the development stage of the contract winds down.

Costs and Expenses

The Company’s costs and expenses were as follows:

Costs and expenses as a percentage of revenue for fiscal 2006 improved .5% points to 94.4% from 94.9% for fiscal 2005 with most ratios improved or unchanged from the prior year. The cost of services ratio decreased as a result of cost management and revenue settlements for which the associated costs were recorded in a prior period. The interest expense ratio decreased primarily as the result of the retirement of $1 billion of term debt during March 2005. These decreases were offset by the impairment charge and loss on sale of equipment due to the termination of portions of the Nortel Networks contract recorded as a special item in fiscal 2006.

The Company substantially matches revenues and costs in the same currency. Therefore, foreign currency did not have a material impact on costs and expenses as a percentage of revenue. However, the Company is increasing its use of offshore support and therefore may be exposed to additional margin fluctuations.

Costs and expenses as a percentage of revenue for fiscal 2005 of 94.9% were in line with fiscal 2004 levels, with certain identifiable variance factors generally offsetting. The depreciation and amortization ratio was up somewhat, driven by fixed asset investments in the U.S. Federal sector and an unfavorable mix variance resulting

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from Global Commercial operations increasing as a percent of CSC’s total. This increase was offset by a decrease in the interest expense ratio. Special items were flat as a percent of revenue for fiscal 2005 and 2004.

Costs of Services

Costs of services as a percentage of revenue decreased .3% points to 80.2% for fiscal 2006 as a result of a decrease in the Global Commercial ratio of .2% points to 76.9% and a .4% point decrease in the U.S. Federal sector ratio to 86.3%. The ratio for fiscal 2006 benefited, as noted below, from cost of services amounts carried at the Corporate level for fiscal 2005 which included $24 million of accrued cost related to the settlement of an overtime pay class action lawsuit.

The Global Commercial cost of services ratio for fiscal 2006 benefited from reductions in the ratio in Europe as a result of outsourcing improvements in the United Kingdom offset somewhat by higher ratios for other European consulting and systems integration business. These improvements in Europe were offset by a higher ratio for U.S. outsourcing as a result of start up and termination activities and an unfavorable mix impact as revenue from higher margin software license sales was lower for the year. The costs of services ratio benefited from certain revenue items such as revenue settlements with clients for which the related costs were recognized in a prior period, a pre-tax $8 million gain from the sale of a building and the novation of certain contracts. These items favorably benefited the ratio approximately .2% points.

The U.S. Federal sector ratio for fiscal 2006 benefited from increased margins for certain time and materials contracts on subcontractor work and materials and cost containment on a fixed unit price contract. The year over year comparison also benefited .2% from unfavorable adjustments during fiscal 2005 on certain programs for which recovery of costs was not probable. These factors were somewhat offset by an adverse estimate to complete adjustment on a state project contributing approximately (.1%) points to the ratio.

For fiscal 2005 costs of services as a percentage of revenue were 80.5%, unchanged from fiscal 2004. The Global Commercial sector ratio was essentially unchanged, 77.1% vs. 77.2%, but had an approximately .2% favorable mix impact on the Company’s composite ratio due to the increase in Global Commercial operations as a percentage of the total. With a higher proportion of infrastructure services and a broader service offering, the Global Commercial sector cost base has relatively more depreciation and amortization and selling, general and administrative expenses and less labor and other cost of services than the U.S. Federal sector.

The Global Commercial cost of services ratio for fiscal 2005 benefited from certain revenue items, including the recognition of deferred revenue related to a renegotiated contract, client settlement payments and gains on the sale of minor, non-core businesses. These had an approximately .4% favorable impact on the ratio. The ratio also included the adverse impact of costs related to facility consolidations in our U.S. consulting operations, certain asset write-downs to net realizable value, and the cost of closure for our Australian product reseller business. These factors had an adverse impact of approximately .3% on the cost of services ratio.

U.S. Federal sector cost of services as a percentage of revenue increased approximately .8% for fiscal 2005. Factors include the recognition of costs on certain programs for which recoverability has been determined to not be probable, contributing approximately .6%. The year-over-year comparison is also adversely impacted by approximately .3% of favorable adjustments during fiscal 2004 resulting from normal program reviews on long-term projects.

Cost of services amounts carried at the Corporate level for fiscal 2005 include $24 million of accrued cost related to the settlement of an overtime pay class action lawsuit. These costs were not allocated to the Company’s segments as individual settlement recipients had yet to be identified.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses of 5.8% as a percentage of revenue for fiscal 2006 were, before rounding effects, essentially unchanged from the prior year. An increase in the ratio for the U.S.

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Federal operations of .5% points was offset by a decrease in the Global Commercial ratio of .1% points. The U.S. Federal sector ratio increase was attributable to increased expenses in the new business development area and increased management and bid and proposal costs. The Global commercial ratio improvement was the result of savings in new business selling costs as a result of fewer significant new business opportunities and a reduction in general and administrative costs. Global Commercial SG&A expense was adversely impacted by a pre-tax $18 million provision for doubtful accounts related to negotiations with an outsourcing customer regarding certain contract provisions.

The .2% point fiscal 2005 SG&A improvement compared to fiscal 2004 was attributable to improvement from both of CSC’s segments. The U.S. Federal sector contributed approximately two-thirds of the improvement, driven by reduced bid and proposal costs as a percentage of revenue as well as executive and administrative staff and other cost reductions. Global Commercial ratio improvement was the result of leveraging existing levels of staff and systems to support the higher revenue level, particularly in U.S. outsourcing operations.

Depreciation and Amortization

Depreciation and amortization expense of $1,091.8 million for fiscal 2006 represents 7.5% of revenue and was unchanged from the ratio of 7.5% for fiscal 2005. Improvement in the U.S. Federal sector ratio was offset by an increase in the Global Commercial ratio. The U.S. Federal sector ratio decreased by .1% point predominantly due to decreases in amortization of certain intangibles acquired in the Dyncorp acquisition. The Global Commercial ratio increased as a result of significant upfront capital investment for outsourcing contracts awarded during fiscal 2005 and 2004 in Europe and Asia and capital refreshes necessary on some existing contracts, offset by lower levels of capital investment for U.S. commercial operations due to the termination of the Nortel and Sears contracts and a favorable mix variance from Australian operations due to revenue growth in non-capital intensive business lines.

Depreciation and amortization expense as a percentage of revenue increased to 7.5% from 7.2% for fiscal 2005 versus fiscal 2004. The U.S. Federal sector ratio increase, accounting for approximately .2% of the Company’s ratio increase, was most significantly attributable to fixed asset investments on a large infrastructure outsourcing contract. An unfavorable mix variance, also contributing .2% of the ratio rise, was the result of the increasing Global Commercial activities’ share of the total. Global Commercial operations, with a higher proportion of infrastructure-related services, had a higher ratio of depreciation and amortization expense to revenue. The mix impact was offset somewhat, and the Global Commercial ratio decreased slightly for fiscal 2005, due to new outsourcing accounts, particularly in the U.S., having lower depreciation and amortization than the existing composite business. This was primarily attributable to certain new clients for which CSC did not purchase the existing asset inventory, but will be responsible for asset replacement. Therefore, the depreciation ratio on those accounts can be expected to rise over time.

Interest Expense and Interest Income

The decrease in interest expense for fiscal 2006 compared to fiscal 2005 was due to lower average debt levels during fiscal 2006 as the result of the retirement of $1 billion of term debt during March 2005. The interest saving from the retirement of the term debt was slightly offset by an increase in interest expense from capitalized leases, and short-term borrowings for working capital needs in Europe. The combination of these factors resulted in a reduction in interest expense of $52.6 million. In addition, interest income, including dividend income from the DynCorp International 13% preferred stock, increased approximately $24.7 million for fiscal 2006 resulting in a .6% improvement in the net interest expense ratio. During May 2006, the Company received approximately $169 million from DynCorp International for the redemption of the preferred stock and payment of cumulative dividends of approximately $22.5 million.

The decrease in interest expense, net of interest income, for fiscal 2005 compared to fiscal 2004 was due to lower average debt levels and an increase in interest income. The generation of cash flow, which limited the need

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to issue commercial paper, and the retirement of $1 billion of term debt during March 2005 combined to reduce interest expense by $13.0 million. In addition, interest income, including income from the invested proceeds from the sale of DynCorp International, increased approximately $6.9 million for fiscal 2005 resulting in a .2% improvement in the net interest expense ratio.

Special Items

Effective February 28, 2006 Nortel Networks (Nortel) terminated the Company’s services for certain information technology outsourcing activities under the outsourcing agreement between Nortel and the Company. As a result of the termination of these services the Company recorded a non-cash special charge of $52.0 million in the second quarter of fiscal 2006 to write down outsourcing contract costs and certain equipment associated with the contract to their estimated fair value. The Company recorded an additional charge in the fourth quarter of fiscal 2006 of $25.3 million to write down the remaining assets to fair value, recognize a loss on the assets sold to Nortel under the terms of the termination settlement, record severance costs for those employees who were not hired by Nortel or redeployed within the Company and record costs associated with terminating the contract for a total charge of $77.3 million ($48.3 million after tax) or 26 cents per share.

During the fourth quarter of fiscal 2005 the Company recorded a charge of $29.5 million for premium payments and the write down of deferred financing costs and interest discount related to the early redemption of $1 billion of term debt. The Company elected to make this early redemption and incur the charges as it had available cash and these debt issues carried interest rates above current prevailing rates. See Note 9 to the consolidated financial statements for further description. The debt redemption charge was partially offset by the reversal in the fourth quarter of previously recorded facility restructuring accruals of $.9 million. The combined special items had a $0.10 per share impact on earnings per share and a .2% net impact on the Company’s profit margin in fiscal 2005.

CSC’s net profit margin for fiscal 2004 was reduced .2% for charges associated with the Special Item related to the DynCorp acquisition. The charges relate to exit or disposal activities of legacy CSC operations as a result of an assessment of requirements for the combined CSC-DynCorp organization. See Note 6 to the consolidated financial statements for further description. Charges related to this Special Item were booked during the fourth quarter of fiscal 2003 through the third quarter of fiscal 2004 and had a $0.08 per share impact on earnings per share in fiscal 2004. The impact to fiscal 2003 margins was insignificant.

Taxes

The provision for taxes on continuing operations as a percentage of pre-tax earnings was 29.7%, 30.6% and 29.6% for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. The decrease in the effective tax rate during fiscal 2006 was the result of the favorable resolution of certain tax related issues from prior years and the subsequent reversal of amounts accrued for these issues. This offset the diminishing favorable impact on the effective rate of permanent tax differences. The increase in the effective tax rate from fiscal 2004 to fiscal 2005 was primarily a result of increased profits and the decreasing impact of existing favorable permanent tax differences that do not vary directly with increased profits. The increases in pretax income in fiscal 2006 and 2005 resulted in a $25.1 million and $18.5 million increase in taxes on income from continuing operations for fiscal 2006 and 2005, respectively, compared to previous fiscal years. See Note 7 to the consolidated financial statements for further discussion of income taxes.

Discontinued Operations

Income from discontinued operations net of taxes was $61.3 million, $313.8 million and $43.2 million, respectively, for fiscal years 2006, 2005 and 2004. Income from discontinued operations during fiscal 2006 included the gain on sale of Health Plan Solutions of $22.9 million and the gain from the working capital adjustment for the sale of DynCorp International of $38.4 million. The Company received $65.5 million par value preferred stock for the working capital adjustment and recorded taxes of $20.7 million and a valuation

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allowance of approximately $6.5 million against the preferred stock. Income from discontinued operations during fiscal 2005 includes the net after tax gain on the sale of DynCorp International of $228.8 million or approximately $1.19 per share. In fiscal 2005, proceeds from the sale included $775 million of cash and $75 million of par value preferred stock. Discontinued operations for fiscal 2005 and 2004 included the operations of DynCorp International, sold during the fourth quarter of fiscal 2005, and the operations of Health Plan Solutions which was classified as held for sale as of April 1, 2005 and sold during the first quarter of fiscal 2006.

Cumulative Effect of Change in Accounting Principle

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143.” During fiscal 2006, the Company recorded a Cumulative Effect of a Change in Accounting Principle of $5.6 million ($4.3 million after tax) or $0.02 per share as a result of implementing the Interpretation to account for the Company’s unrecorded legal obligations to restore some of its leased facilities to their original condition upon lease expiration.

Earnings Per Share and Share Base

Earnings per share from continuing operations increased $0.48 to $3.07 for fiscal 2006. Earnings per share from continuing operations for fiscal 2006 were adversely impacted by special charges of $0.26 per share, and were favorably impacted by an increase in income from continuing operations and a decline in average share base of 4.1 million for fiscal 2006. This decline in the share base was driven primarily by the Company’s acquisition of 7.13 million treasury shares in the HPS exchange which reduced weighted average shares outstanding by 6.6 million shares for fiscal 2006. This reduction was partially offset by employee stock option exercises during fiscal 2006. Common stock equivalents declined slightly on a year over year basis.

FINANCIAL CONDITION

Cash Flows

Historically, the majority of the Company’s cash and cash equivalents have been provided from operating activities. Operating activities for fiscal 2006 generated $1.6 billion in net cash compared to $1.9 billion generated for fiscal 2005 and reflect the anticipated increase in investment in working capital assets as the result of new business won during fiscal 2005. As discussed below changes to the Company’s working capital such as lower levels of accounts payable and year over year declines in the increase in the balances of accrued expenses and deferred revenue drove the decrease in operating cash flow.

The Company’s working capital was impacted by:

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The Company has submitted 16 Requests for Equitable Adjustment (REAs) totaling in excess of $900 million on two U.S. Federal contracts. Included in current assets on the Company’s balance sheet is approximately $770 million of unbilled accounts receivable and deferred costs related to the contracts. CSC has requested payment for certain related out-of-scope work directed or caused by the customers in support of their critical missions. The contractual modification process for scope changes has lagged behind the need for CSC to provide critical on-going operational support. The Company does not record any profit element when it defers costs associated with such REAs. The Company believes it has a legal basis for pursuing recovery of these REAs and that collection is probable. Settlement of the amounts depends on individual circumstances and negotiations with the parties and we are unable to predict the timing of resolution of the REAs.

Operating activities for fiscal 2005 generated $1.9 billion in net cash, up from $1.7 billion generated for fiscal 2004. Higher net earnings, coupled with higher levels of accounts payable, accrued expenses and deferred revenue, drove the increase in operating cash. In addition, higher non-cash expenses such as depreciation and amortization and an increase in deferred revenue as a result of prepayments from customers for services and up-front payments for contract start-up and transition activities contributed to the increase in cash generated from operating activities. Partially offsetting these inflows was an increase in prepaid expenses as the result of increases in work in process and deferred costs related to expected contract modifications with the U.S. federal government, and an increase in receivables due to the growth in revenue. The increase in receivables was driven by the increase in revenues.

The Company’s capital investments principally relate to purchases of computer equipment and purchases and development of software, and deferred outsourcing contract costs that support the Company’s expanding Global Commercial operations. Investments include computer equipment purchased at the inception of outsourcing contracts as well as for subsequent upgrades, expansion or replacement of these client-supporting assets. For cash flow presentation purposes, the Outsourcing Contracts line includes amounts paid to clients for assets purchased from the clients that are categorized as property and equipment on the balance sheet. Outsourcing contract costs are also comprised of incremental external costs as well as certain internal costs that directly relate to a contract’s acquisition or start-up, including payments to clients for amounts in excess of the fair market value of acquired assets (premium). Outsourcing contracts awarded during fiscal 2005, including Zurich Financial Services and Ascension Health contracts and design and build contracts with the United Kingdom’s National Health Service, drove much of the investing cash out flow during the year.

While increasing new business will typically generate higher overall capital investments, the mix of the new business will also impact the level of capital. The growth in U.S. Federal awards during fiscal 2006 and the expected growth in consulting and systems integration work is expected to limit the growth in overall capital

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investment in fiscal 2007 as U.S. Federal contracts and consulting and systems integration projects typically require lower levels of initial investment when compared with similar commercial outsourcing contracts. This coupled with the Company’s continued focus on improving cash flows and return on investment is expected to result in a decrease in cash outflow from investing activities for fiscal 2007.

Dispositions of investments in businesses have from time to time generated investing cash flows for the Company. During the fourth quarter of fiscal 2005 the disposition of DynCorp International generated $775 million in cash proceeds. As discussed below the Company used these proceeds to reduce debt levels during that quarter.

As described above, historically a majority of the Company’s capital investments have been funded by cash from operations. Fiscal 2006 continued to reflect this trend as the Company’s debt level remained at or near its lowest level since fiscal 2000. Financing cash flows for fiscal 2005 reflected the Company’s continued commitment to reduce its overall debt levels and improve its debt to total capitalization ratio as the proceeds from the sale of DynCorp International were utilized to redeem $1.0 billion of term debt during the fourth quarter of fiscal 2005. Cash outflows to redeem the term debt included $27.8 million of early redemption premiums. At year-end fiscal 2006 and 2005, there was no outstanding commercial paper, a result of cash generated from operations.

Partially offsetting the financing cash out flows were cash proceeds from the exercise of employee stock options during fiscal 2006 and 2005.

During fiscal 2004 the Company issued $300 million of 3.50% term debt due April 2008 with the proceeds used to reduce outstanding commercial paper and support general corporate purposes.

Liquidity and Capital Resources

The balance of cash and cash equivalents was $1,290.7 million at March 31, 2006, $1,010.3 million at April 1, 2005, and $562.8 million at April 2, 2004. During fiscal 2006, equity increased as a result of the Company’s earnings, the exercise of employee stock options and the impact on equity of a decrease in the unfunded pension obligation of $16.0 million ($14.2 million net of taxes), partially offset by foreign currency translation adjustment of $169.6 million and the acquisition of treasury stock. At the end of fiscal 2006, CSC’s ratio of debt to total capitalization was 17.8%, consistent with fiscal 2005 year end and down from 30.1% at the end of fiscal 2004. This debt ratio improvement is the result of debt reduction and equity increases during fiscal 2006 and fiscal 2005. The Company’s debt to total capitalization ratio of 17.8% as of the end of fiscal 2006 is low compared to the Company’s ratios during the last five years. However, the ratio may rise in the future if the Company identifies suitable investment opportunities or experiences other significant capital requirements.

The Company’s sources of liquidity include cash, commercial paper and committed and uncommitted lines of credit. Short-term borrowings are principally used to supplement operating cash flow in funding working capital requirements. Forecasted positive cash flows for the year are expected to limit the need for short-term borrowings during fiscal 2007.

At March 31, 2006, the Company had a committed line of credit providing $700 million of long-term commercial paper backup which expires on August 13, 2009. If the Company were unable to sell its commercial paper, borrow under its uncommitted lines of credit, or determines it is too costly to do either of the aforementioned, the Company has the ability to borrow under this committed line of credit. This line of credit has the option of being drawn at a Base Rate, a Eurodollar Rate or a bid option rate. The line requires the Company

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to 1) limit liens placed on our assets to $100 million and to liens incurred in the ordinary course of business; 2) maintain a not-to-exceed ratio of consolidated total debt to consolidated total capitalization of .50 to 1.00; and 3) not permit on any date the ratio of consolidated total debt outstanding to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the period of four consecutive fiscal quarters ending on or immediately prior to such date, to exceed 2.50 to 1.00. For further details on this agreement please see Exhibit 10.23, which is incorporated by reference to this Annual Report. As of March 31, 2006 the Company’s total liquidity was approximately $1,991 million which included cash and cash equivalents and marketable securities of $1,290.7 million and availability under the syndicated backstop credit facility of $700 million. As of March 31, 2006, the Company had no borrowings under this credit facility and was in compliance with all terms of the agreement.

At March 31, 2006, the Company had $56.6 million of short-term borrowings and $1.4 billion of long-term debt. As further described in Note 9 to the consolidated financial statements, the classification of the commercial paper is determined by the expiration date of its credit facility. The Company had no outstanding commercial paper as of March 31, 2006.

In March 2005, the Company used the proceeds from the sale of DynCorp International and cash on hand to redeem the 7.5% term notes due August 2005, and the 6.75% term notes due June 2006 for $998.9 million, and an early redemption premium of $27.8 million. In addition, during fiscal 2004, the Company issued $300 million of term debt from its fiscal 2002 shelf registration.

On March 21, 2005, the Company instituted a voluntary share repurchase program for shareholders owning less than 100 shares. Under this program which has now expired, the Company repurchased 48,443 shares for $2.2 million on April 25, 2005 and 11,000 shares for $.5 million on May 31, 2005.

Off Balance Sheet Arrangements and Contractual Obligations

The following table summarizes the expiration of the Company’s financial guarantees outstanding as of March 31, 2006:

See Note 9 to the consolidated financial statements for further discussion.

The following table summarizes the Company’s payments on contractual obligations by period as of March 31, 2006: