##### Table of Contents



x
 December 31, 2005
  o
 
 001-12665
  
  Delaware
    
    51-0310342(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 2828 North Haskell, Dallas, Texas
    
    75204(Address of principal executive offices)
    
    (Zip Code)
  Not Applicable
 
  x o
 (Check one):
 Large accelerated filer x
    
    Accelerated filer o
    
    Non-accelerated filer o
 o x
  Number of shares outstanding as ofTitle of each class
    
    February 5, 2006Class A Common Stock, $.01 par value
    
    
    118,302,227Class B Common Stock, $.01 par value
    
    
    6,599,372




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##### 



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
  PAGENUMBERPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements:Consolidated Balance Sheets at December 31, 2005 and June 30, 2005
    
    
    1Consolidated Statements of Income for the Three and Six Months Ended December 31, 2005 and 2004
    
    
    2Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    47Item 4.
    
    Controls and Procedures
    
    
    47PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    48Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 5.
    
    Other Information
    
    
    50Item 6.
    
    Exhibits
    
    
    50Voting AgreementCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)




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##### Table of Contents



PART I
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 December 31,
    
    
    June 30,2005
    
    
    2005(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    107,263
    
    
    $
    62,685Accounts receivable, net
    
    
    1,232,322
    
    
    
    1,061,590Prepaid expenses and other current assets
    
    
    159,446
    
    
    
    119,822Assets held for sale
    
    
    8,385
    
    
    
    Total current assets
    
    
    1,507,416
    
    
    
    1,244,097Property, equipment and software, net
    
    
    768,315
    
    
    
    677,241Goodwill
    
    
    2,396,626
    
    
    
    2,334,655Other intangibles, net
    
    
    480,423
    
    
    
    466,312Other assets
    
    
    158,224
    
    
    
    128,533Total assets
    
    $
    5,311,004
    
    
    $
    4,850,838LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    88,106
    
    
    $
    62,788Accrued compensation and benefits
    
    
    157,328
    
    
    
    175,782Other accrued liabilities
    
    
    521,395
    
    
    
    471,577Income taxes payable
    
    
    29,194
    
    
    
    2,310Deferred taxes
    
    
    28,939
    
    
    
    34,996Current portion of long-term debt
    
    
    7,489
    
    
    
    6,192Current portion of unearned revenue
    
    
    98,837
    
    
    
    84,469Total current liabilities
    
    
    931,288
    
    
    
    838,114Senior Notes, net of unamortized discount
    
    
    499,328
    
    
    
    499,288Other long-term debt
    
    
    426,275
    
    
    
    251,067Deferred taxes
    
    
    287,285
    
    
    
    240,210Other long-term liabilities
    
    
    196,979
    
    
    
    183,731Total liabilities
    
    
    2,341,155
    
    
    
    2,012,410Commitments and contingencies (See Notes 10, 13 and 16)Stockholders equity:Class A common stock
    
    
    1,389
    
    
    
    1,379Class B common stock
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,837,051
    
    
    
    1,792,629Accumulated other comprehensive loss, net
    
    
    (13,449
    )
    
    
    (10,910
    )Retained earnings
    
    
    2,213,516
    
    
    
    2,016,197Treasury stock at cost, 21,256 and 19,255 shares, respectively
    
    
    (1,068,724
    )
    
    
    (960,933
    )Total stockholders equity
    
    
    2,969,849
    
    
    
    2,838,428Total liabilities and stockholders equity
    
    $
    5,311,004
    
    
    $
    4,850,838
  1




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 (in thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    1,347,587
    
    
    $
    1,027,286
    
    
    $
    2,658,504
    
    
    $
    2,073,468Expenses:Wages and benefits
    
    
    632,889
    
    
    
    435,970
    
    
    
    1,261,008
    
    
    
    867,818Services and supplies
    
    
    305,889
    
    
    
    251,006
    
    
    
    596,661
    
    
    
    526,068Rent, lease and maintenance
    
    
    163,541
    
    
    
    121,124
    
    
    
    318,713
    
    
    
    240,117Depreciation and amortization
    
    
    70,444
    
    
    
    55,586
    
    
    
    138,524
    
    
    
    109,905Gain on sale of business
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )
    
    
    Other operating expenses
    
    
    28,595
    
    
    
    8,676
    
    
    
    42,606
    
    
    
    19,595Total operating expenses
    
    
    1,171,593
    
    
    
    872,362
    
    
    
    2,327,747
    
    
    
    1,763,503Operating income
    
    
    175,994
    
    
    
    154,924
    
    
    
    330,757
    
    
    
    309,965Interest expense
    
    
    13,333
    
    
    
    2,869
    
    
    
    25,461
    
    
    
    6,824Other non-operating income, net
    
    
    (1,994
    )
    
    
    (1,776
    )
    
    
    (6,375
    )
    
    
    (1,342
    )Pretax profit
    
    
    164,655
    
    
    
    153,831
    
    
    
    311,671
    
    
    
    304,483Income tax expense
    
    
    61,459
    
    
    
    57,686
    
    
    
    114,351
    
    
    
    114,181Net income
    
    $
    103,196
    
    
    $
    96,145
    
    
    $
    197,320
    
    
    $
    190,302Earnings per share:Basic
    
    $
    0.83
    
    
    $
    0.75
    
    
    $
    1.58
    
    
    $
    1.48Diluted
    
    $
    0.81
    
    
    $
    0.73
    
    
    $
    1.55
    
    
    $
    1.45Shares used in computing earnings per share:Basic
    
    
    124,849
    
    
    
    128,619
    
    
    
    125,139
    
    
    
    128,283Diluted
    
    
    126,865
    
    
    
    131,933
    
    
    
    127,044
    
    
    
    131,501
  2




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (in thousands)
 Six Months EndedDecember 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    197,320
    
    
    $
    190,302Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    138,524
    
    
    
    109,905Stock-based compensation expense
    
    
    17,371
    
    
    
    Excess tax benefits from stock-based compensation arrangements
    
    
    (9,480
    )
    
    
    Tax benefit on stock options
    
    
    
    
    
    
    14,389Gain on sale of business
    
    
    (29,765
    )
    
    
    Provision for uncollectible accounts receivable
    
    
    4,495
    
    
    
    1,128Deferred income tax expense
    
    
    34,698
    
    
    
    43,813Asset impairments
    
    
    5,755
    
    
    
    Contract inducement amortization
    
    
    7,613
    
    
    
    6,249Gain on investments
    
    
    (4,903
    )
    
    
    (1,311
    )Other non-cash activities
    
    
    3,244
    
    
    
    (110
    )Changes in assets and liabilities, net of effects from acquisitions:(Increase) decrease in accounts receivable
    
    
    (26,848
    )
    
    
    37,827Increase in prepaid expenses and other current assets
    
    
    (5,044
    )
    
    
    (8,493
    )Decrease in other assets
    
    
    2,987
    
    
    
    6,599Increase (decrease) in accounts payable
    
    
    8,451
    
    
    
    (1,195
    )Decrease in accrued compensation and benefits
    
    
    (21,866
    )
    
    
    (53,342
    )Decrease in other accrued liabilities
    
    
    (31,058
    )
    
    
    (67,222
    )Increase in income taxes payable
    
    
    41,138
    
    
    
    19,621Increase (decrease) in unearned revenue
    
    
    19,521
    
    
    
    (1,253
    )Increase in other long-term liabilities
    
    
    3,596
    
    
    
    2,367Total adjustments
    
    
    158,429
    
    
    
    108,972Net cash provided by operating activities
    
    
    355,749
    
    
    
    299,274Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (184,973
    )
    
    
    (106,553
    )Payments for acquisitions, net of cash acquired
    
    
    (153,760
    )
    
    
    (95,838
    )Additions to other intangible assets
    
    
    (13,046
    )
    
    
    (24,925
    )Intangible assets acquired in subcontract termination
    
    
    (16,530
    )
    
    
    Purchases of investments
    
    
    (25,439
    )
    
    
    (4,587
    )Other
    
    
    24
    
    
    
    463Net cash used in investing activities
    
    
    (393,724
    )
    
    
    (231,440
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    1,003,629
    
    
    
    865,472Repayments of long-term debt
    
    
    (835,213
    )
    
    
    (992,002
    )Proceeds from stock options exercised
    
    
    30,965
    
    
    
    18,595Executive stock option settlement
    
    
    (18,353
    )
    
    
    Excess tax benefits from stock-based compensation arrangements
    
    
    9,480
    
    
    
    Purchase of treasury shares
    
    
    (115,804
    )
    
    
    (14,849
    )Proceeds from issuance of treasury shares
    
    
    7,849
    
    
    
    13,917Net cash provided by (used in) financing activities
    
    
    82,553
    
    
    
    (108,867
    )Net increase (decrease) in cash and cash equivalents
    
    
    44,578
    
    
    
    (41,033
    )Cash and cash equivalents at beginning of period
    
    
    62,685
    
    
    
    76,899Cash and cash equivalents at end of period
    
    $
    107,263
    
    
    $
    35,866
  3




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
    
    BASIS OF PRESENTATION
    2.
    
    STOCK-BASED COMPENSATION
   Three Months Ended
    
    
    Six Months EndedDecember 31, 2004
    
    
    December 31, 2004Net IncomeAs reported
    
    $
    96,145
    
    
    $
    190,302Less: Pro forma cost of
employee stock-based
compensation plans, net
of income taxes of $3,248
and $5,916, respectively
    
    
    (5,749
    )
    
    
    (11,315
    )Pro forma
    
    $
    90,396
    
    
    $
    178,987Basic earnings per shareAs reported
    
    $
    0.75
    
    
    $
    1.48Pro forma
    
    $
    0.70
    
    
    $
    1.40Diluted earnings per shareAs reported
    
    $
    0.73
    
    
    $
    1.45Pro forma
    
    $
    0.69
    
    
    $
    1.37
  4




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
      5




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Three Months ended
    
    
    Six Months ended DecemberDecember 31, 2005
    
    
    31, 2005Expected volatility
    
    
    22.56
    %
    
    
    22.20
    %Expected term
    
    4.21 years
    
    4.21 yearsRisk-free interest rate
    
    
    3.91
    %
    
    
    3.49
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Three Months ended
    
    
    Six Months ended DecemberDecember 31, 2004
    
    
    31, 2004Expected volatility
    
    
    26.93
    %
    
    
    27.58
    %Expected term
    
    5.25 years
    
    5.35 yearsRisk-free interest rate
    
    
    3.42
    %
    
    
    3.92
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
   Weighted-Average
    
    
    Aggregate IntrinsicWeighted Average
    
    
    Remaining
    
    
    Value (inOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands)Outstanding at September 30, 2005
    
    
    14,474,220
    
    
    $
    41.30
    
    
    
    7.47Granted
    
    
    226,500
    
    
    
    53.39Exercised
    
    
    (516,460
    )
    
    
    31.42Canceled
    
    
    (437,300
    )
    
    
    44.78Outstanding as of December 31, 2005
    
    
    13,746,960
    
    
    $
    41.76
    
    
    
    7.32
    
    
    $
    239,505Outstanding at June 30, 2005
    
    
    15,356,700
    
    
    $
    39.61
    
    
    
    7.42Granted
    
    
    1,588,500
    
    
    
    53.05Exercised
    
    
    (1,027,440
    )
    
    
    30.14Canceled (1)
    
    
    (2,170,800
    )
    
    
    40.30Outstanding as of December 31, 2005
    
    
    13,746,960
    
    
    $
    41.76
    
    
    
    7.32
    
    
    $
    239,505Vested and exercisable at December 31, 2005
    
    
    4,978,410
    
    
    $
    32.68
    
    
    
    5.65
    
    
    $
    131,938
 (1)
    
    Includes the purchase of 610,000 vested options and the cancellation of 640,000
unvested options related to the departure of our former Chief Executive Officer.
 6




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   3.
    
    ACQUISITIONS
   4.
    
    SALE OF GOVERNMENT WELFARE-TO-WORKFORCE SERVICES BUSINESS
  7




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    5.
    
    RESTRUCTURING AND OTHER ACTIVITIES
     8




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Balance at September 30, 2005
    
    $
    Accrual recorded
    
    
    4,671Payments
    
    
    (1,888
    )Balance at December 31, 2005
    
    $
    2,783
   6.
    
    ASSETS HELD FOR SALE
  Assets held for saleIntangible assets related to welfare-to-workforce services business, net
    
    $
    1,607Goodwill related to welfare-to-workforce
services business
    
    
    2,778Corporate aircraft
    
    
    4,000Total assets held for sale
    
    $
    8,385
 7.
    
    GOODWILL AND OTHER INTANGIBLE ASSETS
  Commercial
    
    
    Government
    
    
    TotalBalance as of June 30, 2005
    
    $
    1,217,727
    
    
    $
    1,116,928
    
    
    $
    2,334,655Acquisition activity
    
    
    9,029
    
    
    
    70,694
    
    
    
    79,723Divested business
    
    
    
    
    
    
    (14,974
    )
    
    
    (14,974
    )Assets held for sale
    
    
    
    
    
    
    (2,778
    )
    
    
    (2,778
    )Balance as of December 31, 2005
    
    $
    1,226,756
    
    
    $
    1,169,870
    
    
    $
    2,396,626
  9




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  December 31, 2005
    
    
    June 30, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Acquired customer-related
intangibles
    
    $
    368,377
    
    
    $
    (86,491
    )
    
    $
    377,314
    
    
    $
    (76,515
    )Customer-related intangibles
    
    
    214,798
    
    
    
    (80,975
    )
    
    
    175,571
    
    
    
    (74,336
    )All other
    
    
    14,433
    
    
    
    (4,607
    )
    
    
    12,708
    
    
    
    (3,318
    )Total
    
    $
    597,608
    
    
    $
    (172,073
    )
    
    $
    565,593
    
    
    $
    (154,169
    )Unamortized intangible assets:Title plant
    
    $
    51,045
    
    
    
    
    
    
    $
    51,045Trade name
    
    
    3,843
    
    
    
    
    
    
    
    3,843Total
    
    $
    54,888
    
    
    
    
    
    
    $
    54,888Aggregate Amortization:For the quarter ended December 31, 2005
    
    
    
    
    
    $
    18,089For the quarter ended December 31, 2004
    
    
    
    
    
    
    12,936For the six months ended December 31, 2005
    
    
    
    
    
    
    36,101For the six months ended December 31, 2004
    
    
    
    
    
    
    27,252Estimated amortization for the years ended June 30,2006
    
    
    
    
    
    
    
    
    
    $
    72,6152007
    
    
    
    
    
    
    
    
    
    
    67,2512008
    
    
    
    
    
    
    
    
    
    
    63,2402009
    
    
    
    
    
    
    
    
    
    
    55,4182010
    
    
    
    
    
    
    
    
    
    
    43,495
   8.
    
    PENSION AND OTHER POST-EMPLOYMENT PLANS
 U.S. Pension Plan
 10




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Multi-employer Pension Plan
 Net periodic benefit cost
 Three Months ended
    
    
    Six Months endedDecember 31, 2005
    
    
    December 31, 2005U.S. Plan
    
    
    Non-U.S. Plans
    
    
    U.S. Plan
    
    
    Non-U.S. PlansComponents of net periodic benefit cost:Defined benefit plans:Service cost
    
    $
    345
    
    
    $
    1,155
    
    
    $
    345
    
    
    $
    2,565Interest cost
    
    
    10
    
    
    
    1,160
    
    
    
    10
    
    
    
    2,326Expected return on assets
    
    
    (15
    )
    
    
    (1,218
    )
    
    
    (15
    )
    
    
    (2,445
    )Amortization of prior service cost
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    Net periodic benefit cost for defined benefit plans
    
    $
    360
    
    
    $
    1,097
    
    
    $
    360
    
    
    $
    2,446
  9.
    
    EQUITY
  10.
    
    COMPREHENSIVE INCOME
  11




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    103,196
    
    
    $
    96,145
    
    
    $
    197,320
    
    
    $
    190,302Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (3,385
    )
    
    
    3,833
    
    
    
    (3,610
    )
    
    
    4,611Amortization of unrealized loss on
hedging instruments (net of income tax
of $0.2 million and $0.4 million,
respectively)
    
    
    397
    
    
    
    
    
    
    
    794
    
    
    
    Unrealized gains on foreign exchange
forward agreements (net of income tax
of $166)
    
    
    277
    
    
    
    
    
    
    
    277
    
    
    
    Comprehensive income
    
    $
    100,485
    
    
    $
    99,978
    
    
    $
    194,781
    
    
    $
    194,913
    As of
    
    
    As ofDecember 31, 2005
    
    
    June 30, 2005Foreign currency gains (losses)
    
    $
    (2,731
    )
    
    $
    879Unrealized gains on foreign exchange
forward agreements,
net
    
    
    277
    
    
    
    Unrealized loss on hedging instruments, net
    
    
    (10,995
    )
    
    
    (11,789
    )Total
    
    $
    (13,449
    )
    
    $
    (10,910
    )
 12




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 11.
    
    EARNINGS PER SHARE
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Income available to common stockholders
    
    $
    103,196
    
    
    $
    96,145
    
    
    $
    197,320
    
    
    $
    190,302Denominator:Weighted average shares outstanding (basic)
    
    
    124,849
    
    
    
    128,619
    
    
    
    125,139
    
    
    
    128,283Effect of dilutive securities:Stock options
    
    
    2,016
    
    
    
    3,314
    
    
    
    1,905
    
    
    
    3,218Total potential common shares
    
    
    2,016
    
    
    
    3,314
    
    
    
    1,905
    
    
    
    3,218Denominator for earnings per share assuming dilution
    
    
    126,865
    
    
    
    131,933
    
    
    
    127,044
    
    
    
    131,501Earnings per share (basic)
    
    $
    0.83
    
    
    $
    0.75
    
    
    $
    1.58
    
    
    $
    1.48Earnings per share assuming dilution
    
    $
    0.81
    
    
    $
    0.73
    
    
    $
    1.55
    
    
    $
    1.45
   13




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 12.
    
    SEGMENT INFORMATION
  Commercial
    
    
    Government
    
    
    Corporate
    
    
    ConsolidatedThree months ended December 31, 2005Revenues(a)
    
    $
    784,767
    
    
    $
    562,820
    
    
    $
    
    
    
    $
    1,347,587Operating expenses (excluding
depreciation and amortization) (b)
    
    
    650,829
    
    
    
    449,099
    
    
    
    30,986
    
    
    
    1,130,914Gain on sale of business
    
    
    
    
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Depreciation and amortization
    
    
    47,544
    
    
    
    22,514
    
    
    
    386
    
    
    
    70,444Operating income
    
    $
    86,394
    
    
    $
    120,972
    
    
    $
    (31,372
    )
    
    $
    175,994Three months ended December 31, 2004Revenues (a)
    
    $
    484,743
    
    
    $
    542,543
    
    
    $
    
    
    
    $
    1,027,286Operating expenses (excluding
depreciation and amortization) (b)
    
    
    379,503
    
    
    
    424,586
    
    
    
    12,687
    
    
    
    816,776Depreciation and amortization
    
    
    34,623
    
    
    
    20,487
    
    
    
    476
    
    
    
    55,586Operating income
    
    $
    70,617
    
    
    $
    97,470
    
    
    $
    (13,163
    )
    
    $
    154,924Six months ended December 31, 2005Revenues (a)
    
    $
    1,550,773
    
    
    $
    1,107,731
    
    
    $
    
    
    
    $
    2,658,504Operating expenses (excluding
depreciation and amortization) (b)
    
    
    1,287,383
    
    
    
    871,775
    
    
    
    59,830
    
    
    
    2,218,988Gain on sale of business
    
    
    
    
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Depreciation and amortization
    
    
    92,630
    
    
    
    45,086
    
    
    
    808
    
    
    
    138,524Operating income
    
    $
    170,760
    
    
    $
    220,635
    
    
    $
    (60,638
    )
    
    $
    330,757Six months ended December 31, 2004Revenues (a)
    
    $
    979,406
    
    
    $
    1,094,062
    
    
    $
    
    
    
    $
    2,073,468Operating expenses (excluding
depreciation and amortization) (b)
    
    
    764,272
    
    
    
    864,546
    
    
    
    24,780
    
    
    
    1,653,598Depreciation and amortization
    
    
    68,951
    
    
    
    39,962
    
    
    
    992
    
    
    
    109,905Operating income
    
    $
    146,183
    
    
    $
    189,554
    
    
    $
    (25,772
    )
    
    $
    309,965
 (a)
    
    Revenues in our Government segment include revenues from operations divested during
fiscal year 2004 of $0.2 million and $0.3 million for the three and six months ended
December 31, 2005, respectively, and $0.6 million for the six months ended December 31,
2004.(b)
    
    Corporate operating expenses for the three and six months ended December 31, 2005
include $8.6 million and $17.4 million, respectively, of stock-based compensation expense
pursuant to SFAS 123(R) and $0 for both the three and six months ended December 31, 2004
under our previous accounting method, APB 25.
 14




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 13.
    
    COMMITMENTS AND CONTINGENCIES
    15




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
       16




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   14.
    
    DEPARTURE OF OUR FORMER CHIEF EXECUTIVE OFFICER
   17




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 15.
    
    NEW ACCOUNTING PRONOUNCEMENTS
  16.
    
    SUBSEQUENT EVENT
     18




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
          19




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
      20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    GENERAL
  New Business
  Stock-based Compensation
 21




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Acquisitions
  22




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Sale of Government welfare- to-workforce services business
   Restructuring and other activities
   23




---



##### Table of Contents



Balance at September 30, 2005
    
    $
    Accrual recorded
    
    
    4,671Payments
    
    
    (1,888
    )Balance at December 31, 2005
    
    $
    2,783
   Hedging instruments
 Departure of our former Chief Executive Officer
  24




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Government Healthcare Contract
 Subsequent Event
    25




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26




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27




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REVENUE GROWTH
  Three months ended December 31,
    
    
    Six months ended December 31,2005
    
    
    2004
    
    
    $ Growth
    
    
    Growth %
    
    
    2005
    
    
    2004
    
    
    $ Growth
    
    
    Growth %ConsolidatedTotal Revenues
    
    $
    1,347,587
    
    
    $
    1,027,286
    
    
    $
    320,301
    
    
    
    31%
    
    
    $
    2,658,504
    
    
    $
    2,073,468
    
    
    $
    585,036
    
    
    
    28
    %Less: Divestitures
    
    
    (169
    )
    
    
    (21
    )
    
    
    (148
    )
    
    
    
    
    
    
    (250
    )
    
    
    (560
    )
    
    
    310Adjusted
    
    $
    1,347,418
    
    
    $
    1,027,265
    
    
    $
    320,153
    
    
    
    31%
    
    
    $
    2,658,254
    
    
    $
    2,072,908
    
    
    $
    585,346
    
    
    
    28
    %Acquired revenues
    
    $
    227,522
    
    
    $
    
    
    
    $
    227,522
    
    
    
    22%
    
    
    $
    453,283
    
    
    $
    4,354
    
    
    $
    448,929
    
    
    
    22
    %Internal revenues
    
    
    1,119,896
    
    
    
    1,027,265
    
    
    
    92,631
    
    
    
    9%
    
    
    
    2,204,971
    
    
    
    2,068,554
    
    
    
    136,417
    
    
    
    6
    %Total
    
    $
    1,347,418
    
    
    $
    1,027,265
    
    
    $
    320,153
    
    
    
    31%
    
    
    $
    2,658,254
    
    
    $
    2,072,908
    
    
    $
    585,346
    
    
    
    28
    %CommercialTotal Revenues
    
    $
    784,767
    
    
    $
    484,743
    
    
    $
    300,024
    
    
    
    62%
    
    
    $
    1,550,773
    
    
    $
    979,406
    
    
    $
    571,367
    
    
    
    58
    %Less: Divestitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted
    
    $
    784,767
    
    
    $
    484,743
    
    
    $
    300,024
    
    
    
    62%
    
    
    $
    1,550,773
    
    
    $
    979,406
    
    
    $
    571,367
    
    
    
    58
    %Acquired revenues
    
    $
    210,855
    
    
    $
    
    
    
    $
    210,855
    
    
    
    44%
    
    
    $
    434,210
    
    
    $
    4,166
    
    
    $
    430,044
    
    
    
    44
    %Internal revenues
    
    
    573,912
    
    
    
    484,743
    
    
    
    89,169
    
    
    
    18%
    
    
    
    1,116,563
    
    
    
    975,240
    
    
    
    141,323
    
    
    
    14
    %Total
    
    $
    784,767
    
    
    $
    484,743
    
    
    $
    300,024
    
    
    
    62%
    
    
    $
    1,550,773
    
    
    $
    979,406
    
    
    $
    571,367
    
    
    
    58
    %GovernmentTotal Revenues
    
    $
    562,820
    
    
    $
    542,543
    
    
    $
    20,277
    
    
    
    4%
    
    
    $
    1,107,731
    
    
    $
    1,094,062
    
    
    $
    13,669
    
    
    
    1
    %Less: Divestitures
    
    
    (169
    )
    
    
    (21
    )
    
    
    (148
    )
    
    
    
    
    
    
    (250
    )
    
    
    (560
    )
    
    
    310Adjusted
    
    $
    562,651
    
    
    $
    542,522
    
    
    $
    20,129
    
    
    
    4%
    
    
    $
    1,107,481
    
    
    $
    1,093,502
    
    
    $
    13,979
    
    
    
    1
    %Acquired revenues
    
    $
    16,667
    
    
    $
    
    
    
    $
    16,667
    
    
    
    3%
    
    
    $
    19,073
    
    
    $
    188
    
    
    $
    18,885
    
    
    
    2
    %Internal revenues
    
    
    545,984
    
    
    
    542,522
    
    
    
    3,462
    
    
    
    1%
    
    
    
    1,088,408
    
    
    
    1,093,314
    
    
    
    (4,906
    )
    
    
    (1
    )%Total
    
    $
    562,651
    
    
    $
    542,522
    
    
    $
    20,129
    
    
    
    4%
    
    
    $
    1,107,481
    
    
    $
    1,093,502
    
    
    $
    13,979
    
    
    
    1
    %
 28




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##### Table of Contents



RESULTS OF OPERATIONS
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Wages and benefits
    
    
    47.0
    
    
    
    42.4
    
    
    
    47.4
    
    
    
    41.9Services and supplies
    
    
    22.7
    
    
    
    24.4
    
    
    
    22.5
    
    
    
    25.4Rent, lease and maintenance
    
    
    12.1
    
    
    
    11.8
    
    
    
    12.0
    
    
    
    11.6Depreciation and amortization
    
    
    5.2
    
    
    
    5.4
    
    
    
    5.2
    
    
    
    5.3Gain on sale of business
    
    
    (2.2
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    Other operating expenses
    
    
    2.1
    
    
    
    0.9
    
    
    
    1.6
    
    
    
    0.9Total operating expenses
    
    
    86.9
    
    
    
    84.9
    
    
    
    87.6
    
    
    
    85.1Operating income
    
    
    13.1
    
    
    
    15.1
    
    
    
    12.4
    
    
    
    14.9Interest expense
    
    
    1.0
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    0.3Other non-operating income, net
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Pretax profit
    
    
    12.2
    
    
    
    15.0
    
    
    
    11.7
    
    
    
    14.7Income tax expense
    
    
    4.5
    
    
    
    5.6
    
    
    
    4.3
    
    
    
    5.5Net income
    
    
    7.7
    %
    
    
    9.4
    %
    
    
    7.4
    %
    
    
    9.2
    %
 COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2005 TO THE THREE MONTHS ENDED DECENBER 31, 2004
 Revenues
   29




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##### Table of Contents



Operating Expenses
     Commercial segment:Asset impairment
    
    $
    310Government segment:Provisions for estimated legal settlement and uncollectible accounts
receivable related to the welfare-to-workforce services business
    
    
    3,267Asset impairments
    
    
    1,353Corporate:Aircraft impairment
    
    
    4,092Legal settlements and related costs
    
    
    3,175Legal costs associated with the review of certain recapitalization options
related to our dual class structure and an unsolicited offer regarding a
potential sale of the Company
    
    
    2,656Total
    
    $
    14,853
 Interest Expense
 Income tax expense
 30




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COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2005 TO THE SIX MONTHS ENDED DECEMBER 31, 2004
 Revenues
   Operating Expenses
    31




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##### Table of Contents



Commercial segment:Provision for doubtful accounts for an assessment of risk related to the
bankruptcies of certain airline clients
    
    $
    3,000Asset impairment
    
    
    310Government segment:Provisions for estimated legal settlement and uncollectible accounts
receivable related to the welfare-to-workforce services business
    
    
    3,267Asset impairments
    
    
    1,353Corporate:Aircraft impairment
    
    
    4,092Legal settlements and related costs
    
    
    3,175Legal costs associated with the review of certain recapitalization options
related to our dual class structure and an unsolicited offer regarding a
potential sale of the Company
    
    
    2,656Total
    
    $
    17,853
 Interest Expense
 Other non-operating income, net
 Income tax expense
 LIQUIDITY AND CAPITAL RESOURCES
  Cash Flow
 32




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##### Table of Contents



Six months endedDecember 31,2005
    
    
    2004Net cash provided by operating activities
    
    $
    355,749
    
    
    $
    299,274Purchases of property, equipment and software, net
    
    
    (184,973
    )
    
    
    (106,553
    )Additions to other intangible assets
    
    
    (13,046
    )
    
    
    (24,925
    )Free cash flow
    
    $
    157,730
    
    
    $
    167,796
     33




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Tender Offer
     34




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35




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##### Table of Contents



Credit arrangements
   Derivatives
 Share Repurchase Program
 36




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##### Table of Contents



Other
  DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2005 (IN THOUSANDS):
 Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsSenior Notes, net of unamortized
discount (1)
    
    $
    499,328
    
    
    $
    
    
    
    $
    
    
    
    $
    249,925
    
    
    $
    249,403Long-term debt (1)
    
    
    417,121
    
    
    
    377
    
    
    
    59
    
    
    
    416,685
    
    
    
    Capital lease obligations (1)
    
    
    16,643
    
    
    
    7,112
    
    
    
    9,047
    
    
    
    484
    
    
    
    Operating leases
    
    
    708,610
    
    
    
    209,325
    
    
    
    287,107
    
    
    
    119,376
    
    
    
    92,802Purchase obligations
    
    
    21,577
    
    
    
    8,817
    
    
    
    11,885
    
    
    
    875
    
    
    
    Total Contractual Cash Obligations
    
    $
    1,663,279
    
    
    $
    225,631
    
    
    $
    308,098
    
    
    $
    787,345
    
    
    $
    342,205
 Amount of Commitment Expiration per PeriodTotal Amounts
    
    
    Less thanOther Commercial Commitments
    
    Committed
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsStandby letters of credit
    
    $
    112,405
    
    
    $
    112,405
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    423,026
    
    
    
    412,728
    
    
    
    8,426
    
    
    
    10
    
    
    
    1,862Total Commercial Commitments
    
    $
    535,431
    
    
    $
    525,133
    
    
    $
    8,426
    
    
    $
    10
    
    
    $
    1,862
 (1)
    
    Excludes accrued interest aggregating $3.9 million at December 31, 2005.
  37




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CRITICAL ACCOUNTING POLICIES
   Revenue recognition
 38




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39




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##### Table of Contents



Contingencies
  Valuation of goodwill and intangibles
 Share-Based Compensation
 
    
    Expected volatility of our stock price based on historical monthly volatility over the expected term based on daily
closing stock prices.
    
    Expected term of the option based on historical employee stock option exercise behavior, the vesting term of the
respective option and the contractual term.
    
    Risk-free interest rate for periods within the expected term of the option.
    
    Dividend yield.
   40




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##### Table of Contents



Pension and post-employment benefits
    U.S. Plan
    
    Non-U.S. PlansAs ofDecember 1, 2005(date of plan
    
    As ofadoption)
    
    June 30, 2005Discount rate
    
    
    5.75
    %
    
    
    5.00% - 5.25
    %Rate of increase in compensation levels
    
    
    3.00
    %
    
    
    4.25% - 4.40
    %
  U.S. Plan
    
    Non-U.S. PlansDiscount rate
    
    
    5.75
    %
    
    
    5.00% - 5.25
    %Long-term rate of return on assets
    
    
    8.00
    %
    
    
    7.00% - 7.50
    %Rate of increase in compensation levels
    
    
    3.00
    %
    
    
    4.25% - 4.40
    %
  U.S. Plan
    
    

Non-U.S. PlansPlus .25%
    
    
    Less .25%
    
    
    Plus .25%
    
    
    Less .25%Effect on pension benefit obligation
    
    $
    (105
    )
    
    $
    100
    
    
    $
    (4,490
    )
    
    $
    4,692Effect on service and interest cost
    
    $
    15
    
    
    $
    (15
    )
    
    $
    380
    
    
    $
    (399
    )
  Allowance for doubtful accounts
 41




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##### Table of Contents



Income taxes
  NEW ACCOUNTING PRONOUNCEMENTS
  RISKS RELATED TO OUR BUSINESS
  Leverage position
 Reduction of credit rating
 Loss of, or reduction of business from, significant clients
 42




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##### Table of Contents



Impairment of investments made to attract clients
 Competition
  Difficulties in executing our acquisition strategy
 Failure to properly manage our operations and our growth
 Government clients  termination rights, audits and investigations
 Government clients  protests of contract awards
 43




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##### Table of Contents



Exercise of contract termination provisions and service level penalties
 Pricing risks
 Actuarial consulting services and benefit plan management  potential claims
 Loss of significant software vendor relationships
 Intellectual property infringement claims
 Rapid
technological changes
 44




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##### Table of Contents



United States and foreign jurisdiction laws relating to individually identifiable information
 Breaches
of our physical security systems and data privacy
 Budget deficits at, or fluctuations in the number of requests for proposals issued by, state
and local governments and their agencies
 International risks
 Armed hostilities and terrorist attacks
 45




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##### Table of Contents



Failure to attract and retain necessary technical personnel, skilled management and qualified
subcontractors
 Servicing Risks
 Disruption in Utility or Network Services
 Indemnification Risk
 Concentration of Voting Power
 Other Risks
 46




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
 ITEM 4. CONTROLS AND PROCEDURES
  47




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##### Table of Contents



PART II
 
 ITEM 1. LEGAL PROCEEDINGS
    48




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Maximum number (orTotal number of
    
    
    approximate dollarshares purchased as
    
    
    value) of shares thatpart of publicly
    
    
    may yet be purchasedTotal number of
    
    
    Average price
    
    
    announced plans or
    
    
    under the plans orPeriod
    
    shares purchased
    
    

paid per share
    
    
    programs
    
    
    programsInception through September 30, 2005
    
    
    19,914,514
    
    
    $
    49.91
    
    
    
    19,914,514
    
    
    $
    256,010,038October 1 - October 31, 2005
    
    
    1,008,000
    
    
    
    53.15
    
    
    
    1,008,000
    
    
    
    702,439,160November 1 - November 30, 2005
    
    
    831,000
    
    
    
    53.63
    
    
    
    831,000
    
    
    
    657,875,063December 1 - December 31, 2005
    
    
    322,400
    
    
    
    54.80
    
    
    
    322,400
    
    
    
    640,206,270Total  Quarter ended December 31, 2005
    
    
    2,161,400
    
    
    
    53.58
    
    
    
    2,161,400
    
    
    
    640,206,270Inception through December 31, 2005
    
    
    22,075,914
    
    
    $
    50.27
    
    
    
    22,075,914
    
    
    $
    640,206,270
 Tender Offer
 49




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##### Table of Contents



ITEM 5. OTHER INFORMATION
       
 ITEM 6. EXHIBITS
 a.) ExhibitsReference is made to the Index to Exhibits beginning on page 52 for a list of all exhibits
filed as part of this report.
 50




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##### Table of Contents



SIGNATURES
  AFFILIATED COMPUTER SERVICES, INC.By:
    /s/ Warren D. EdwardsWarren D. EdwardsExecutive Vice President and
Chief Financial Officer 51




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Name2.1
    
    Amendment No. 2 to Purchase Agreement, dated as of November 11,
2005, among Mellon Financial Corporation, Mellon Consultants
European Holdings Limited, Affiliated Computer Services, Inc.,
ACS Business Process Solutions Limited and Affiliated Computer
Services of Germany GmbH (filed as Exhibit 2.1 to our Current
Report on Form 8-K, filed November 16, 2005 and incorporated
herein by reference).3.1
    
    Certificate of Incorporation of Affiliated Computer Services,
Inc. (filed as Exhibit 3.1 to our Registration Statement on Form
S-3, filed March 30, 2001, File No. 333-58038 and incorporated
herein by reference).3.2
    
    Certificate of Correction to Certificate of Amendment of
Affiliated Computer Services, Inc., dated August 30, 2001 (filed
as Exhibit 3.2 to our Annual Report on Form 10-K, filed
September 17, 2003 and incorporated herein by reference).3.3
    
    Bylaws of Affiliated Computer Services, Inc., as amended and in
effect on September 11, 2003 (filed as Exhibit 3.3 to our
Quarterly Report on Form 10-Q, filed February 17, 2004 and
incorporated herein by reference).4.1
    
    Form of New Class A Common Stock Certificate (filed as Exhibit
4.3 to our Registration Statement on Form S-1, filed May 26,
1994, File No. 33-79394 and incorporated herein by reference).4.2
    
    Amended and Restated Rights Agreement, dated April 2, 1999,
between Affiliated Computer Services, Inc. and First City
Transfer Company, as Rights Agent (filed as Exhibit 4.1 to our
Current Report on Form 8-K, filed May 19, 1999 and incorporated
herein by reference).4.3
    
    Amendment No. 1 to Amended and Restated Rights Agreement, dated
as of February 5, 2002, by and between Affiliated Computer
Services, Inc. and First City Transfer Company (filed as Exhibit
4.1 to our Current Report on Form 8-K, filed February 6, 2002
and incorporated herein by reference).4.4
    
    Form of Rights Certificate (included as Exhibit A to the Amended
and Restated Rights Agreement (Exhibit 4.3)).4.5
    
    Indenture, dated as of June 6, 2005, by and between Affiliated
Computer Services, Inc. as Issuer and The Bank of New York Trust
Company, N.A. as Trustee (filed as Exhibit 4.1 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference).4.6
    
    First Supplemental Indenture, dated as of June 6, 2005, by and
between Affiliated Computer Services, Inc. as Issuer and The
Bank of New York Trust Company, N.A. as Trustee, relating to our
4.70% Senior Notes due 2010 (filed as Exhibit 4.2 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference).4.7
    
    Second Supplemental Indenture, dated as of June 6, 2005, by and
between Affiliated Computer Services, Inc. as Issuer and The
Bank of New York Trust Company, N.A. as Trustee, relating to our
5.20% Senior Notes due 2015 (filed as Exhibit 4.3 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference).4.8
    
    Specimen Note for 4.70% Senior Notes due 2010 (filed as Exhibit
4.4 to our Current Report on Form 8-K, filed June 6, 2005 and
incorporated herein by reference).4.9
    
    Specimen Note for 5.20% Senior Notes due 2015 (filed as Exhibit
4.5 to our Current Report on Form 8-K, filed June 6, 2005 and
incorporated herein by reference).9.1*
    
    Voting Agreement dated
February 9, 2006 by and between Affiliated Computer Services,
Inc. and Darwin Deason.10.1
    
    Amendment No.1 to Affiliated Computer Services, Inc. 1997 Stock
Incentive Plan, dated as of October 28, 2004 (filed as Exhibit
4.6 to our Registration Statement on Form S-8, filed December 6,
2005 and incorporated herein by reference).31.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 52




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Name32.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 
 53