Dear Fellow Stockholders,

Our Strategy Is Working

This performance was the result of a strategic plan to position the company for sustainable growth. We developed our approach for transforming the company, creating more focus in the marketplace, collaborating as One SAIC, making larger investments in emerging strategic opportunities, and that approach is paying off handsomely.

Our largest customers and programs continue to be in national security, but we see future opportunities for us in other areas, especially around our energy efficiency, border and port security, cybersecurity, and healthcare information technology offerings. We have focused campaigns in these areas, and we believe the investments we have made position us well for the priorities of President Obama’s administration.

Having said that, the relationship between the federal government and the contractor community is a matter of prominent debate. In an era of increased contractor scrutiny, the steadfast commitment of our employees to our enduring core values has never been more important. There have been a number of constants in our 40-year history, but at the top of the list is our commitment to ethics and customer mission.

I believe that there is no better company to navigate the complexity and uncertainty of the federal government changes than your company. We are used to competing for our work, our margins are not excessive, and we have not pursued work that is beyond our core competencies. Our support for customers in Iraq and Afghanistan, for example, involves vital tasks that are consistent with our strategy, as opposed to merely pursuing available revenue.

We have purposely stayed away from work that we viewed as inherently governmental or close to it. When you compete well, opening more contracts to competition creates opportunities. In the current environment, our platform independence and our focus on mission and technical innovation is a key differentiator in the marketplace.

Looking to the Future

To help ensure we remain competitive in the years ahead, we are transforming our core business processes and systems. Several efforts are already under way, including the establishment of a new shared services center in Oak Ridge, Tenn., that will provide many transaction-based functions in human resources, finance, procurement, and administration. We are also investing in our science and technology capabilities, internal research and development, and in our people, in areas such as management training, employee engagement, and career development.

"In the current environment, our platform independence and our focus on mission and technical innovation is a key differentiator in the marketplace."

Internally, SAIC is well prepared for change, having made the transition from a decentralized set of businesses to a company that collaborates and innovates to operate in changing environments. We continue to put people first and to maintain our customers’ mission success that provides us with resilience and market insight.

We face a world that continues to be a highly uncertain and dangerous place. The rebalancing of power among nations, the continued threat of terrorism and ungoverned spaces, the fundamental restructuring of the world’s economic system, climate change, and an increasingly precarious balance between energy supply and demand all serve as potential sources of instability. They also create opportunities for companies prepared to help the U.S. government, its allies, and private sector organizations solve the world’s most difficult problems.

Strong and Balanced Financial Performance

In this challenging market environment, we have turned in very strong performances in all four major metrics—revenue, operating margin, earnings per share, and cash flow. Revenues for fiscal year 2009 (FY09) were $10.07 billion, up 13 percent from fiscal year 2008 (FY08). Internal, or non-acquisition, growth represented 10 percentage points of the consolidated growth for the fiscal year. Key market segments of internal growth included logistics, information collection and security, and defense information technology, which offset weakness in our commercial business.

Operating income for FY09 was $776 million (7.7 percent of revenue), up 15 percent from FY08. Income from continuing operations for FY09 was $447 million, up 15 percent from FY08. Diluted earnings per share from continuing operations for FY09 were $1.10, up 17 percent from FY08. Diluted earnings per share, which include discontinued operations, were $1.12 for FY09, up 12 percent from FY08.

Equally important, our effective management of working capital generated strong operating and net cash flow, which has further built our financial strength heading into fiscal year 2010. I believe our conservative financial posture is a key differentiator as well as a major strategic asset and positions us well in this period of economic uncertainty.

Cash flow from operations for FY09 was $583 million, up 68 percent from FY08. As of January 31, 2009, the company had $936 million in cash and cash equivalents and $1.1 billion in long-term debt. Our cash is invested prudently. Before the financial markets took a downturn, we moved all of our U.S. cash holdings to U.S. Treasuries for greater security. We will consider shifting back to higher-return instruments only when we are satisfied the returns fairly compensate us for the risks and are consistent with our number-one priority—to preserve our capital.

New Business Highlights

FY09 was a record year for our larger wins, with 27 awards valued at $100 million or greater, compared to 17 in FY08. Moreover, the average value of our contract award wins for the year increased by 20 percent in FY09 compared to FY08, reflecting again our focus on and success in winning larger opportunities.

For example, we won a new, $410 million contract to provide information technology support to the U.S. Army Human Resources Command and unseated a long-term incumbent on a $254 million contract to support a key intelligence customer. We also were awarded a $454 million task order to support the Army National Guard Reserve Component Automation System and the Distributive Training Technology Project.

"In this challenging market environment, we have turned in very strong performances in all four major metrics—revenue, operating margin, earnings per share, and cash flow."

Expanding our growing energy business, we won multiple-award energy savings performance contracts with the U.S. Department of Energy and the U.S. Army Corps of Engineers. These contracts position us well to capitalize on our energy efficiency capabilities, which may be the vehicles through which economic stimulus funds are deployed.

In a major follow-on win, SAIC-Frederick, Inc., a wholly owned SAIC subsidiary, received a contract from the National Cancer Institute (NCI) to continue providing operations and technical support to NCI’s Federally Funded Research and Development Center in Frederick, Md., which we have supported since 1995.

Strategic Acquisitions

We remain committed to acquisitions that have strategic and financial value. In FY09, SAIC acquired SM Consulting, Inc. (SMC) and Icon Systems, Inc. (Icon). SMC provides services in language, intelligence, information technology, management consulting, business process outsourcing, training, and logistics to federal, state, and local governments and private industry.

Icon is a leader in the design, development and production of state-of-the-art laser-based systems and products for military training and testing. This strategic move gives us significant opportunities to help our customers—both national and international—enhance warfighter readiness and effectiveness.

Committed to the Highest Standards

SAIC continues to be recognized by customers, industry associations and business and technology media for leadership in many areas. For example, we retained the number four position in the information technology services industry category on FORTUNE’s® 2009 list of the World’s Most Admired Companies. The list identifies companies with the strongest reputations, based on feedback from approximately 15,000 senior executives and directors from eligible companies, along with financial analysts.

"We retained the number four position in the information technology services industry category on FORTUNE’s® 2009 list of the World’s Most Admired Companies."

In FY09, the Ethisphere Institute ranked SAIC seventh on its World’s Most Ethical Companies list of government contractors. The Ethisphere Institute is an organization dedicated to the creation and sharing of best practices in ethics, compliance and corporate governance.

Highly Skilled and Innovative Employees

At SAIC we know our employees are central to the success of our company. We strive to attract and retain the finest talent. In FY09, we enhanced our employee benefits by providing a comprehensive health and wellness program accessible to both employees and their families through a broad range of services, including personal health coaching and disease management. Employee recruiting and retention continued to improve in FY09. The recession is undoubtedly helping with retention but so is our focus on employee engagement.

We also reconfigured our incentive compensation program for our key top executives. Previously, a greater portion of our long-term compensation was retention-based. This new program consists of options and performance-based grants of stock. The value executives receive from the performance stock grants is based on the attainment of three-year targets for earnings per share growth and operating margin improvement. Our management team is committed to growing long-term value for our stockholders. We believe this change better aligns compensation to growing long-term stockholder value.

Corporate Responsibility

SAIC and its employees have long practiced the principles of corporate responsibility. As a company, we are committed to the support of our employees, the enrichment of our communities, and the improvement of our environment. I am proud of our company’s efforts in endeavors in the last year such as helping the American Cancer Society Border Sierra Region raise $300,000 and our support of the construction of the Pentagon Memorial dedicated to the 184 people killed there on September 11, 2001. SAIC lost one of its own in the terrorist attack—Khang Nguyen, an SAIC employee working at the Pentagon. I am also proud that SAIC attracts employees who make a difference in their communities, often volunteering together as “Team SAIC.”

Building on Our Success

Our challenge in the coming year is to build on the outstanding results of 2009. Achieving our value creation goals will require a combination of operational excellence and both internal and acquisitive investments to grow our market access and offerings. We will continue to work toward balanced improvement in financial performance, including growth and enhanced profitability, while retaining our strong capital structure and liquidity.

This year also marked SAIC’s 40th anniversary. In 1969, our founder, Dr. J. Robert Beyster, set out to build a company by tackling tough problems for the nation with a talented, entrepreneurial work force, and a dedication to ethics and integrity. Dr. Beyster’s enduring vision is still at work today, guiding the talented men and women of SAIC in their commitment to our customers’ success.

Ken Dahlberg
CEO and Chairman of the Board