2006 2005 2004 In millions

Income before income taxes

United States . . . $224 $187 $ 93 Foreign . . . 88 97 106 Total income before income taxes . . . $312 $284 $199

For the years ended December 31, income tax expense consisted of the following:

2006 2005 2004 In millions Income tax expense (benefit)

Current

Federal . . . $ 80 $ 55 $ 59 State and local . . . 13 13 12 Foreign . . . 31 28 28 Deferred

Federal . . . (10) (23) (40) State and local . . . (2) (4) (7) Foreign . . . 2 9 9 Total income tax expense . . . $114 $ 78 $ 61

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:

2006 2005 2004 In millions Income tax expense at the U.S. federal tax rate of 35% . . . $109 $ 99 $ 70 Foreign income tax differential . . . 2 9 2 State and local income taxes . . . 11 9 5 U.S. permanent book/tax differences . . . (9) (1) (4) Tax audit settlements . . . — (33) (14) Other, net . . . 1 (5) 2 Total income tax expense . . . $114 $ 78 $ 61 Teradata’s tax provisions include a provision for income taxes in certain tax jurisdictions where its operations are profitable, but reflect only a portion of the tax benefits related to certain foreign operations’ tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. The 2005 income tax provision includes $33 million of benefits as a result of NCR’s resolution of prior year tax audits. During 2005, NCR settled the tax audit for years 1997-1999 with the appellate level of the IRS resulting in a tax benefit of $14 million. Also in 2005, NCR settled the tax audit for years 2000-2002 with the examination level of the IRS resulting in a tax benefit of $19 million. The initial income tax accruals were established based upon the nature of uncertain tax positions in the federal return, and accruals for the related interest were compounded each year. The accruals were established by specifically identifying risk items within the tax return and then assessing the likelihood of the items being challenged or overturned. The tax accruals were necessary due to uncertainty regarding the ultimate sustainability of tax return deductions taken for areas that are prone to tax controversy and are complex areas of tax law. The 2004 income tax provision includes $14 million of benefits as a result of NCR’s settlement of tax audit issues relating to the periods when NCR was a subsidiary of AT&T. Teradata’s benefits from NCR’s settlement of the tax audits described above was based on the specific identification of settled tax matters directly attributable to Teradata’s income before taxes, plus a reasonable ratable allocation of settled matters that were related to tax matters and filing positions attributable to both Teradata and NCR.

Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows: 2006 2005

In millions Deferred income tax assets

Reserves and allowances . . . $ 30 $ 20 Tax loss and credit carryforwards . . . 90 84 Capitalized research and development . . . 212 213 Other . . . 47 44 Total deferred income tax assets . . . 379 361 Valuation allowance . . . (43) (35) Net deferred income tax assets . . . 336 326 Teradata recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of future benefits from those assets. The valuation allowances cover deferred tax assets, primarily tax loss carryforwards, in tax jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those tax losses. As of December 31, 2006, Teradata had U.S. federal and foreign tax loss carryforwards of approximately $256 million.

Teradata did not provide for U.S. federal income taxes or foreign withholding taxes on approximately $155 million in 2006 of undistributed earnings of its foreign subsidiaries because such earnings are intended to be reinvested indefinitely.

Adoption of FIN 48 (unaudited)

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing thresholds and attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on

derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. Under FIN 48, Teradata may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement.

As part of NCR, Teradata adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact Teradata’s results of operations or net assets. The liability for income taxes associated with uncertain tax positions at January 1, 2007 was $20 million. This liability can be reduced by $5 million for offsetting tax benefits associated with potential transfer pricing adjustments across different tax jurisdictions. This net unrecognized tax benefit of $15 million would favorably impact the effective tax rate, if recognized. The $5 million for offsetting tax benefits was previously recorded in income tax reserves. Upon the adoption of FIN 48, this amount was reclassified to other assets.

Teradata recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision, which is consistent with the recognition of these items in prior reporting periods. As of January 1, 2007, Teradata had $4 million of accrued interest and penalties.

NCR is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. NCR has effectively settled all U.S. federal tax audits through 2002; however, the U.S. federal statute of limitations remains open for 2000 and onward. NCR is currently under examination by the IRS for 2003—2005. NCR expects that the IRS will complete the examination of 2003 and 2004 and issue its examination report during 2007. The examination report should include all proposed adjustments for tax years 2003 and 2004. Upon receipt of the report, NCR will have 30 days to review and either agree with the adjustments or issue a formal protest.

Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. NCR is currently under examination by foreign tax authorities in major jurisdictions including Canada (1997-2004), France (1997-2003), Germany (2001-2004), Japan (2000-2005), Netherlands (2000-2003), and the

United Kingdom (1994-2006). NCR is also currently under examination in various U.S. state jurisdictions. Prior to its spin-off from AT&T in 1996, NCR filed certain consolidated or combined federal and state tax returns with AT&T. These returns are subject to a tax sharing agreement governing the allocation and

apportionment of the uncertain federal and state tax benefits and liabilities. Teradata’s net liability for income taxes associated with uncertain tax positions includes items subject to the tax sharing agreement with AT&T.