##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedDecember 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the period from  to
 Commission file number 001-12665
 AFFILIATED COMPUTER SERVICES, INC.
  Delaware
    
    51-0310342(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 2828 North Haskell, Dallas, Texas
    
    75204(Address of principal executive offices)
    
    (Zip Code)
  Not Applicable
 
  þ o
  þ o o
 o þ
  Number of shares outstanding as ofTitle of each class
    

February 8, 2007Class A Common Stock, $.01 par value
    
    92,314,491Class 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, 2006 and
June 30, 2006
    
    
    1Consolidated Statements of Income for the Three and Six Months
Ended December 31, 2006 and 2005
    
    
    2Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2006 and 2005
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    31Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    62Item 4.
    
    Controls and Procedures
    
    
    63PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    64Item 1A.
    
    Risk Factors
    
    
    64Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    64Item 3.
    
    Defaults Upon Senior Securities
    
    
    64Item 6.
    
    Exhibits
    
    
    66Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
 December 31,
    
    
    June 30,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    333,155
    
    
    $
    100,837Accounts receivable, net
    
    
    1,253,575
    
    
    
    1,231,846Income taxes receivable
    
    
    
    
    
    
    8,090Prepaid expenses and other current assets
    
    
    205,051
    
    
    
    188,490Total current assets
    
    
    1,791,781
    
    
    
    1,529,263Property, equipment and software, net
    
    
    935,902
    
    
    
    870,020Goodwill
    
    
    2,536,361
    
    
    
    2,456,654Other intangibles, net
    
    
    484,557
    
    
    
    475,701Other assets
    
    
    180,064
    
    
    
    170,799Total assets
    
    $
    5,928,665
    
    
    $
    5,502,437LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    88,909
    
    
    $
    104,473Accrued compensation and benefits
    
    
    161,910
    
    
    
    172,853Other accrued liabilities
    
    
    353,954
    
    
    
    354,632Income taxes payable
    
    
    1,508
    
    
    
    Deferred taxes
    
    
    11,923
    
    
    
    18,047Current portion of long-term debt
    
    
    44,411
    
    
    
    23,074Current portion of unearned revenue
    
    
    156,682
    
    
    
    152,026Total current liabilities
    
    
    819,297
    
    
    
    825,105Senior Notes, net of unamortized discount
    
    
    499,408
    
    
    
    499,368Other long-term debt
    
    
    2,067,169
    
    
    
    1,114,664Deferred taxes
    
    
    362,702
    
    
    
    331,433Other long-term liabilities
    
    
    289,452
    
    
    
    275,649Total liabilities
    
    
    4,038,028
    
    
    
    3,046,219Commitments and contingencies (See Notes 2, 7, 14 and 18)Stockholders equity:Class A common stock, $.01 par value, 500,000 shares authorized,
113,316 and 129,848 shares issued, respectively
    
    
    1,133
    
    
    
    1,299Class B convertible common stock, $.01 par value, 14,000
shares authorized, 6,600 shares issued and outstanding
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,604,025
    
    
    
    1,799,778Accumulated other comprehensive loss, net
    
    
    (1,100
    )
    
    
    (10,943
    )Retained earnings
    
    
    1,342,481
    
    
    
    1,836,850Treasury stock at cost, 21,002 and 23,289 shares, respectively
    
    
    (1,055,968
    )
    
    
    (1,170,832
    )Total stockholders equity
    
    
    1,890,637
    
    
    
    2,456,218Total liabilities and stockholders equity
    
    $
    5,928,665
    
    
    $
    5,502,437
  1




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##### Table of Contents



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
    
    
    
    
    
    
    20052006
    
    
    (as restated)
    
    
    2006
    
    
    (as restated)Revenues
    
    $
    1,426,761
    
    
    $
    1,347,587
    
    
    $
    2,812,199
    
    
    $
    2,658,504Operating expenses:Cost of revenues:Wages and benefits
    
    
    667,852
    
    
    
    633,461
    
    
    
    1,334,468
    
    
    
    1,262,146Services and supplies
    
    
    317,618
    
    
    
    305,889
    
    
    
    608,980
    
    
    
    596,661Rent, lease and maintenance
    
    
    177,099
    
    
    
    163,541
    
    
    
    356,155
    
    
    
    318,713Depreciation and amortization
    
    
    85,228
    
    
    
    70,444
    
    
    
    166,866
    
    
    
    138,524Other
    
    
    9,141
    
    
    
    7,511
    
    
    
    19,755
    
    
    
    11,758Total cost of revenues
    
    
    1,256,938
    
    
    
    1,180,846
    
    
    
    2,486,224
    
    
    
    2,327,802Gain on sale of business
    
    
    
    
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Other operating expenses
    
    
    19,495
    
    
    
    21,084
    
    
    
    34,789
    
    
    
    30,848Total operating expenses
    
    
    1,276,433
    
    
    
    1,172,165
    
    
    
    2,521,013
    
    
    
    2,328,885Operating income
    
    
    150,328
    
    
    
    175,422
    
    
    
    291,186
    
    
    
    329,619Interest expense
    
    
    48,085
    
    
    
    14,056
    
    
    
    94,098
    
    
    
    26,795Other non-operating income, net
    
    
    (9,686
    )
    
    
    (1,994
    )
    
    
    (12,304
    )
    
    
    (6,375
    )Pretax profit
    
    
    111,929
    
    
    
    163,360
    
    
    
    209,392
    
    
    
    309,199Income tax expense
    
    
    39,855
    
    
    
    60,990
    
    
    
    75,935
    
    
    
    113,454Net income
    
    $
    72,074
    
    
    $
    102,370
    
    
    $
    133,457
    
    
    $
    195,745Earnings per share:Basic
    
    $
    0.73
    
    
    $
    0.82
    
    
    $
    1.32
    
    
    $
    1.56Diluted
    
    $
    0.72
    
    
    $
    0.81
    
    
    $
    1.30
    
    
    $
    1.54Shares used in computing earnings per share:Basic
    
    
    98,914
    
    
    
    124,849
    
    
    
    101,183
    
    
    
    125,139Diluted
    
    
    100,152
    
    
    
    126,926
    
    
    
    102,457
    
    
    
    127,106
  2




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Six Months EndedDecember 31,20052006
    
    
    (as restated)Cash flows from operating activities:Net income
    
    $
    133,457
    
    
    $
    195,745Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    166,866
    
    
    
    138,524Stock-based compensation expense
    
    
    15,592
    
    
    
    18,509Excess tax benefit on stock-based compensation
    
    
    (31
    )
    
    
    (7,658
    )Gain on sale of business units
    
    
    (2,459
    )
    
    
    (29,765
    )Provision for uncollectible accounts receivable
    
    
    (1,007
    )
    
    
    4,495Deferred income tax expense
    
    
    15,485
    
    
    
    37,072Impairment charges
    
    
    1,231
    
    
    
    5,755Gain on investments
    
    
    (5,440
    )
    
    
    (4,903
    )Other non-cash activities
    
    
    11,786
    
    
    
    10,857Changes in assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (5,496
    )
    
    
    (26,848
    )Prepaid expenses and other current assets
    
    
    (15,143
    )
    
    
    (5,044
    )Other assets
    
    
    2,433
    
    
    
    2,987Accounts payable
    
    
    (21,399
    )
    
    
    8,451Accrued compensation and benefits
    
    
    (17,880
    )
    
    
    (21,866
    )Other accrued liabilities
    
    
    (2,519
    )
    
    
    (31,058
    )Income taxes payable
    
    
    13,398
    
    
    
    41,138Other long-term liabilities
    
    
    4,744
    
    
    
    1,659Unearned revenue
    
    
    11,096
    
    
    
    19,521Total adjustments
    
    
    171,257
    
    
    
    161,826Net cash provided by operating activities
    
    
    304,714
    
    
    
    357,571Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (170,441
    )
    
    
    (184,973
    )Additions to other intangible assets
    
    
    (14,969
    )
    
    
    (13,046
    )Payments for acquisitions, net of cash acquired
    
    
    (102,338
    )
    
    
    (153,760
    )Intangible assets acquired in subcontract termination
    
    
    
    
    
    
    (16,530
    )Purchases of investments
    
    
    (6,406
    )
    
    
    (25,439
    )Other
    
    
    1,276
    
    
    
    24Net cash used in investing activities
    
    
    (292,878
    )
    
    
    (393,724
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    1,648,287
    
    
    
    1,003,629Payments of long-term debt
    
    
    (705,093
    )
    
    
    (835,213
    )Purchase of treasury shares
    
    
    (730,689
    )
    
    
    (115,804
    )Excess tax benefit on stock-based compensation
    
    
    31
    
    
    
    7,658Stock option settlement with Jeffrey A. Rich, former chief executive
officer
    
    
    
    
    
    
    (18,353
    )Proceeds from stock options exercised
    
    
    5,023
    
    
    
    30,965Proceeds from issuance of treasury shares
    
    
    2,923
    
    
    
    7,849Net cash provided by financing activities
    
    
    220,482
    
    
    
    80,731Net change in cash and cash equivalents
    
    
    232,318
    
    
    
    44,578Cash and cash equivalents at beginning of period
    
    
    100,837
    
    
    
    62,685Cash and cash equivalents at end of period
    
    $
    333,155
    
    
    $
    107,263
  3




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. BASIS OF PRESENTATION
      2. REVIEW OF STOCK OPTION GRANT PRACTICES
      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)
     
    
    The stock options held by our employees (other than Messrs. King and Edwards and one
management employee) will be adjusted as necessary, with the optionees consent, to avoid
adverse tax consequences to the employee, and we will compensate such employees for any
increase in exercise price resulting from the matters which were the subject of the
internal investigation.
    
    Our non-employee directors, to avoid the appearance of inappropriate gain, voluntarily
agreed that with respect to any historical option grants to them which require incremental
compensation expense as a result of revised measurement dates, the exercise price will be
increased to equal the fair market value of the stock on the revised measurement date,
regardless of whether such increase is necessary to avoid adverse tax consequences to the
director. The non-employee directors will not be reimbursed to offset any individual loss
of economic benefit related to such repriced stock options.
    
    Another employee (not an officer as defined in Rule 16a-1(f) under the Securities
Exchange Act of 1934) will be reassigned and all of such employees stock options will be
repriced so that the exercise price equals the fair market value of our stock on the proper
measurement date.
    
    We will consider whether to recover certain profits from Jeffrey A. Rich, former Chief
Executive Officer, which relate to stock options awarded to Mr. Rich which the internal
investigation concluded were awarded through a process in which favorable grant dates were
selected after the fact.
    
    We implemented, or are in the process of implementing, a number of changes to our
internal controls, including:
 o
    
    After reviewing the results of the investigation to date, our Board of
Directors determined that it would be appropriate to accept the resignations of Mr.
King and Mr. Edwards. Our Board of Directors has since appointed a new Chief
Executive Officer and Chief Financial Officer.o
    
    Designating internal legal and accounting staffs to oversee the
documentation and accounting of all grants of stock options or restricted stock.o
    
    Monitoring industry and regulatory developments in stock option and
restricted stock awards and implementing and maintaining best practices with respect
to grants of stock options or restricted stock.o
    
    Adhering to the practice of making annual grants on a date certain and
through board or committee meetings, and not through a unanimous written consent
process.
  6




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
     7




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Decrease in cumulative net income and retained earnings:Stock-based compensation expense
    
    $
    (51,207
    )Estimated tax related penalties and interest on underpayment
deficiencies resulting from disallowed Section 162(m)
executive compensation deductions
    
    
    (11,562
    )Decrease in pretax profit
    
    
    (62,769
    )Income tax benefit, net
    
    
    12,918Decrease in cumulative net income and retained earnings
    
    
    
    
    
    $
    (49,851
    )Increase to additional paid-in capital:Stock-based compensation expense
    
    
    51,207Reduction of excess tax benefits for stock options
exercised, due to revised measurement dates (1)
    
    
    (10,210
    )Reduction of excess tax benefits for certain stock options
exercised related to disallowed Section 162(m) executive
compensation deductions, due to revised measurement dates
(2)
    
    
    (13,372
    )Reduction of excess tax benefits for certain stock options
exercised related to disallowed executive compensation
deductions previously believed to qualify for Section 162(m)
exceptions, due to factors unrelated to revised measurement
dates (3)
    
    
    (10,505
    )Increase in additional paid-in capital
    
    
    
    
    
    
    17,120Decrease in stockholders equity at June 30, 2006
    
    
    
    
    
    $
    (32,731
    )
 
 (1)
    
    We recorded cumulative deferred income tax benefits of $15.3 million for the income tax
effect related to the stock-based compensation expense adjustments arising from revised
measurement dates, of which $10.2 million has been realized through June 30, 2006 upon stock
option exercises and has been reflected as a reduction of excess tax benefits previously
recorded in additional paid-in capital.(2)
    
    Excess tax benefits for certain stock-based executive compensation deductions from stock
option exercises previously recorded in additional paid-in capital are now disallowed under
Section 162(m) due to revised measurement dates of certain stock option grants. See Other Tax
Matters below in this discussion of Review of Stock Option Grant Practices.(3)
    
    Excess tax benefits for certain stock-based executive compensation deductions from stock
option exercises previously recorded in additional paid-in capital may now be non-deductible
under Section 162(m) as a result of information obtained by us in connection with our internal
investigation, due to factors unrelated to revised measurement dates. See Other Tax Matters
below in this discussion of Review of Stock Option Grant Practices. 8




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  IncomeStock-based
    
    
    Estimated
    
    
    taxcompensation
    
    
    interest and
    
    
    benefit,
    
    
    Totalexpense
    
    
    penalties (1)
    
    
    net
    
    
    adjustmentsYears ended June 30,1995
    
    
    
    
    
    $
    (63
    )
    
    $
    
    
    
    $
    23
    
    
    $
    (40
    )1996
    
    
    
    
    
    
    (444
    )
    
    
    
    
    
    
    130
    
    
    
    (314
    )1997
    
    
    
    
    
    
    (1,404
    )
    
    
    
    
    
    
    301
    
    
    
    (1,103
    )1998
    
    
    
    
    
    
    (1,876
    )
    
    
    
    
    
    
    405
    
    
    
    (1,471
    )1999
    
    
    
    
    
    
    (3,325
    )
    
    
    
    
    
    
    717
    
    
    
    (2,608
    )2000
    
    
    
    
    
    
    (4,870
    )
    
    
    (87
    )
    
    
    511
    
    
    
    (4,446
    )2001
    
    
    
    
    
    
    (6,433
    )
    
    
    (546
    )
    
    
    1,074
    
    
    
    (5,905
    )2002
    
    
    
    
    
    
    (7,833
    )
    
    
    (1,414
    )
    
    
    1,636
    
    
    
    (7,611
    )2003
    
    
    
    
    
    
    (9,237
    )
    
    
    (1,454
    )
    
    
    2,119
    
    
    
    (8,572
    )Cumulative effect at June 30, 2003
    
    
    
    
    
    
    (35,485
    )
    
    
    (3,501
    )
    
    
    6,916
    
    
    
    (32,070
    )Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Netincome as
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    income asreported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    restatedYears ended June 30,2004
    
    $
    529,843
    
    
    
    (7,527
    )
    
    
    (2,509
    )
    
    
    1,921
    
    
    
    (8,115
    )
    
    $
    521,7282005
    
    
    415,945
    
    
    
    (6,061
    )
    
    
    (2,526
    )
    
    
    2,211
    
    
    
    (6,376
    )
    
    
    409,5692006
    
    
    
    
    
    
    (2,134
    )
    
    
    (3,026
    )
    
    
    1,870
    
    
    
    (3,290
    )Cumulative effect at June 30, 2006
    
    
    
    
    
    $
    (51,207
    )
    
    $
    (11,562
    )
    
    $
    12,918
    
    
    $
    (49,851
    )
 
 (1)
    
    Estimated interest and penalties on income tax underpayment deficiencies resulting
from disallowed executive compensation deductions under Section 162(m).    9




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Currentincome taxexpense onDeferred
    
    
    Current
    
    
    disallowedincome tax
    
    
    income tax
    
    
    deductionsbenefit on
    
    
    benefit on
    
    
    understock-based
    
    
    deductible
    
    
    Section
    
    
    Income taxcompensation
    
    
    interest
    
    
    162(m)
    
    
    benefit, netYears ended June 30,1995
    
    $
    23
    
    
    $
    
    
    
    $
    
    
    
    $
    231996
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    1301997
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    3011998
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    4051999
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    7172000
    
    
    945
    
    
    
    
    
    
    
    (434
    )
    
    
    5112001
    
    
    1,598
    
    
    
    
    
    
    
    (524
    )
    
    
    1,0742002
    
    
    2,287
    
    
    
    
    
    
    
    (651
    )
    
    
    1,6362003
    
    
    3,246
    
    
    
    70
    
    
    
    (1,197
    )
    
    
    2,119Cumulative effect at June 30, 2003
    
    
    9,652
    
    
    
    70
    
    
    
    (2,806
    )
    
    
    6,916Years ended June 30,2004
    
    
    2,702
    
    
    
    387
    
    
    
    (1,168
    )
    
    
    1,9212005
    
    
    2,194
    
    
    
    576
    
    
    
    (559
    )
    
    
    2,2112006
    
    
    774
    
    
    
    1,096
    
    
    
    
    
    
    
    1,870Cumulative effect at June 30, 2006
    
    $
    15,322
    
    
    $
    2,129
    
    
    $
    (4,533
    )
    
    $
    12,918
 Other tax matters
  10




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   11




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Consolidated Statements of IncomeThree Months ended December 31, 2005
    
    
    Six Months ended December 31, 2005As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedRevenues
    
    $
    1,347,587
    
    
    $
    
    
    
    $
    1,347,587
    
    
    $
    2,658,504
    
    
    $
    
    
    
    $
    2,658,504Operating expenses:Cost of revenues:Wages and benefits
    
    
    632,889
    
    
    
    572
    (1)
    
    
    633,461
    
    
    
    1,261,008
    
    
    
    1,138
    (1)
    
    
    1,262,146Services and supplies
    
    
    305,889
    
    
    
    
    
    
    
    305,889
    
    
    
    596,661
    
    
    
    
    
    
    
    596,661Rent, lease and maintenance
    
    
    163,541
    
    
    
    
    
    
    
    163,541
    
    
    
    318,713
    
    
    
    
    
    
    
    318,713Depreciation and amortization
    
    
    70,444
    
    
    
    
    
    
    
    70,444
    
    
    
    138,524
    
    
    
    
    
    
    
    138,524Other
    
    
    7,511
    
    
    
    
    
    
    
    7,511
    
    
    
    11,758
    
    
    
    
    
    
    
    11,758Cost of revenues
    
    
    1,180,274
    
    
    
    572
    
    
    
    1,180,846
    
    
    
    2,326,664
    
    
    
    1,138
    
    
    
    2,327,802Gain on sale of business
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Other operating expenses
    
    
    21,084
    
    
    
    
    
    
    
    21,084
    
    
    
    30,848
    
    
    
    
    
    
    
    30,848Total operating expenses
    
    
    1,171,593
    
    
    
    572
    
    
    
    1,172,165
    
    
    
    2,327,747
    
    
    
    1,138
    
    
    
    2,328,885Operating income
    
    
    175,994
    
    
    
    (572
    )
    
    
    175,422
    
    
    
    330,757
    
    
    
    (1,138
    )
    
    
    329,619Interest expense
    
    
    13,333
    
    
    
    723
    (2)
    
    
    14,056
    
    
    
    25,461
    
    
    
    1,334
    (2)
    
    
    26,795Other non-operating income, net
    
    
    (1,994
    )
    
    
    
    
    
    
    (1,994
    )
    
    
    (6,375
    )
    
    
    
    
    
    
    (6,375
    )Pretax profit
    
    
    164,655
    
    
    
    (1,295
    )
    
    
    163,360
    
    
    
    311,671
    
    
    
    (2,472
    )
    
    
    309,199Income tax expense
    
    
    61,459
    
    
    
    (469
    )(3)
    
    
    60,990
    
    
    
    114,351
    
    
    
    (897
    )(3)
    
    
    113,454Net income
    
    $
    103,196
    
    
    $
    (826
    )
    
    $
    102,370
    
    
    $
    197,320
    
    
    $
    (1,575
    )
    
    $
    195,745Earnings per share:Basic
    
    $
    0.83
    
    
    $
    (0.01
    )
    
    $
    0.82
    
    
    $
    1.58
    
    
    $
    (0.02
    )
    
    $
    1.56Diluted
    
    $
    0.81
    
    
    $
    
    
    
    $
    0.81
    
    
    $
    1.55
    
    
    $
    (0.01
    )
    
    $
    1.54Shares used in computing earnings
per share:Basic
    
    
    124,849
    
    
    
    
    
    
    
    124,849
    
    
    
    125,139
    
    
    
    
    
    
    
    125,139Diluted (5)
    
    
    126,865
    
    
    
    61
    (4)
    
    
    126,926
    
    
    
    127,044
    
    
    
    62
    (4)
    
    
    127,106
 12




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Consolidated Statement of Cash FlowsFor the six months ended December 31, 2005As Reported
    
    Adjustments
    
    As RestatedCash flows from operating activities:Net income
    
    $
    197,320
    
    
    $
    (1,575
    )
    
    $
    195,745Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    138,524
    
    
    
    
    
    
    
    138,524Stock-based compensation expense
    
    
    17,371
    
    
    
    1,138
    (1)
    
    
    18,509Excess tax benefit on stock-based compensation
    
    
    (9,480
    )
    
    
    1,822
    
    
    
    (7,658
    )Gain on sale of business units
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Provision for uncollectible accounts receivable
    
    
    4,495
    
    
    
    
    
    
    
    4,495Deferred income tax expense
    
    
    34,698
    
    
    
    2,374
    (6)
    
    
    37,072Impairment charges
    
    
    5,755
    
    
    
    
    
    
    
    5,755Other non-cash activities
    
    
    5,954
    
    
    
    
    
    
    
    5,954Changes in assets and liabilities, net of
effects from acquisitions:Accounts receivable
    
    
    (26,848
    )
    
    
    
    
    
    
    (26,848
    )Prepaid expenses and other current assets
    
    
    (5,044
    )
    
    
    
    
    
    
    (5,044
    )Other assets
    
    
    2,987
    
    
    
    
    
    
    
    2,987Accounts payable
    
    
    8,451
    
    
    
    
    
    
    
    8,451Accrued compensation and benefits
    
    
    (21,866
    )
    
    
    
    
    
    
    (21,866
    )Other accrued liabilities
    
    
    (31,058
    )
    
    
    
    
    
    
    (31,058
    )Income taxes receivable/payable
    
    
    41,138
    
    
    
    
    
    
    
    41,138Other long-term liabilities
    
    
    3,596
    
    
    
    (1,937
    )
    
    
    1,659Unearned revenue
    
    
    19,521
    
    
    
    
    
    
    
    19,521Total adjustments
    
    
    158,429
    
    
    
    3,397
    
    
    
    161,826Net cash provided by operating activities
    
    
    355,749
    
    
    
    1,822
    
    
    
    357,571Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (184,973
    )
    
    
    
    
    
    
    (184,973
    )Additions to other intangible assets
    
    
    (13,046
    )
    
    
    
    
    
    
    (13,046
    )Payments for acquisitions, net of cash acquired
    
    
    (153,760
    )
    
    
    
    
    
    
    (153,760
    )Intangibles acquired in subcontract termination
    
    
    (16,530
    )
    
    
    
    
    
    
    (16,530
    )Purchases of investments
    
    
    (25,439
    )
    
    
    
    
    
    
    (25,439
    )Other
    
    
    24
    
    
    
    
    
    
    
    24Net cash used in investing activities
    
    
    (393,724
    )
    
    
    
    
    
    
    (393,724
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    1,003,629
    
    
    
    
    
    
    
    1,003,629Payments of long-term debt
    
    
    (835,213
    )
    
    
    
    
    
    
    (835,213
    )Purchase of treasury shares
    
    
    (115,804
    )
    
    
    
    
    
    
    (115,804
    )Excess tax benefit on stock-based compensation
    
    
    9,480
    
    
    
    (1,822
    )
    
    
    7,658Stock option settlement with Jeffrey A. Rich,
former chief executive officer
    
    
    (18,353
    )
    
    
    
    
    
    
    (18,353
    )Proceeds from stock options exercised
    
    
    30,965
    
    
    
    
    
    
    
    30,965Proceeds from issuance of treasury shares
    
    
    7,849
    
    
    
    
    
    
    
    7,849Net cash provided by financing activities
    
    
    82,553
    
    
    
    (1,822
    )
    
    
    80,731Net change in cash and cash equivalents
    
    
    44,578
    
    
    
    
    
    
    
    44,578Cash and cash equivalents at beginning of period
    
    
    62,685
    
    
    
    
    
    
    
    62,685Cash and cash equivalents at end of period
    
    $
    107,263
    
    
    $
    
    
    
    $
    107,263
 13




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 (1)
    
    Stock-based compensation expense.(2)
    
    Estimated interest expense on Section 162(m) deduction disallowances.(3)
    
    Income tax benefits for additional stock-based compensation expense and
estimated interest expense.(4)
    
    Adjustment to dilutive shares resulting from changes in unrecognized
compensation and excess tax benefits.(5)
    
    Basic earnings per share of common stock is computed using the weighted
average number of our common shares outstanding during the periods. Diluted earnings per
share is adjusted for the incremental shares that would be outstanding upon the assumed
exercise of stock options. Shares used in computing diluted earnings per share includes the
weighted average shares outstanding for the period used in calculating basic earnings per
share, plus the dilutive effect of stock options outstanding during the period. Share
dilution for the period presented excludes the effect of options outstanding that were
considered antidilutive because the average market price of the underlying stock did not
exceed the sum of the option exercise price, unrecognized compensation expense and windfall
tax benefits.(6)
    
    Deferred income taxes associated with additional stock-based
compensation expense, net of reversals related to stock option exercises.
 3. ACQUISITIONS
     4. DIVESTITURES
  14




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   5. RESTRUCTURING ACTIVITIES
    Balance at September 30, 2006
    
    $
    5,050Accrual recorded
    
    
    2Payments
    
    
    (3,915
    )Balance at December 31, 2006
    
    $
    1,137Balance at June 30, 2006
    
    $
    899Accrual recorded
    
    
    5,060Payments
    
    
    (4,822
    )Balance at December 31, 2006
    
    $
    1,137
   15




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 6. GOODWILL AND OTHER INTANGIBLE ASSETS
  Commercial
    
    
    Government
    
    
    TotalBalance as of June 30, 2006
    
    $
    1,282,053
    
    
    $
    1,174,601
    
    
    $
    2,456,654Acquisition activity
    
    
    71,825
    
    
    
    2,890
    
    
    
    74,715Foreign currency translation
    
    
    3,052
    
    
    
    1,940
    
    
    
    4,992Balance as of December 31, 2006
    
    $
    1,356,930
    
    
    $
    1,179,431
    
    
    $
    2,536,361
   December 31, 2006
    
    
    June 30, 2006Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortizable intangible assets:Acquired customer-related
intangibles
    
    $
    412,425
    
    
    
    (125,772
    )
    
    $
    384,738
    
    
    $
    (104,901
    )Customer-related intangibles
    
    
    238,979
    
    
    
    (104,510
    )
    
    
    222,268
    
    
    
    (90,326
    )All other
    
    
    16,241
    
    
    
    (7,694
    )
    
    
    15,147
    
    
    
    (6,113
    )Total
    
    $
    667,645
    
    
    
    (237,976
    )
    
    $
    622,153
    
    
    $
    (201,340
    )Non-amortizable intangible assets:Title plant
    
    $
    51,045
    
    
    
    
    
    
    $
    51,045Trade name
    
    
    3,843
    
    
    
    
    
    
    
    3,843Total
    
    $
    54,888
    
    
    
    
    
    
    $
    54,888Aggregate Amortization:For the quarter ended December 31, 2006
    
    
    
    
    
    
    
    
    
    $
    19,893For the quarter ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    18,089For the six months ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    38,658For the six months ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    36,101Estimated amortization for the years ended June 30,2007
    
    
    
    
    
    
    
    
    
    $
    82,8312008
    
    
    
    
    
    
    
    
    
    
    74,8312009
    
    
    
    
    
    
    
    
    
    
    65,1762010
    
    
    
    
    
    
    
    
    
    
    55,4842011
    
    
    
    
    
    
    
    
    
    
    47,863
  16




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 7. LONG-TERM DEBT
 Credit Facility
     (1)
    
    Consent to the delivery, on or prior to February 14, 2007,
of (i) the financial statements, accountants report and
compliance certificate for the fiscal year ended June 30,
2006 and (ii) financial statements and related compliance
certificates for the fiscal quarters ended June 30, 2006
and September 30, 2006, and waiver of any default arising
from the failure to deliver any such financial statements,
reports or certificates within the applicable time period
provided for in the Credit Agreement, provided that any
such failure to deliver resulted directly or indirectly
from the previously announced investigation of the
Companys historical stock option grant practices (the
Options Matter).(2)
    
    Waiver of any default or event of default arising from the
incorrectness of representations and warranties made or
deemed to have been made with respect to certain financial
statements previously delivered to the Agent as a result of
any restatement, adjustment or other modification of such
financial statements resulting directly or indirectly from
the Options Matter.(3)
    
    Waiver of any default or event of default which may arise
from the Companys or its subsidiaries failure to comply
with reporting covenants under other indebtedness that are
similar to those in the Credit Agreement (including any
covenant to file any report with the Securities and
Exchange Commission or to furnish such reports to the
holders of such indebtedness), provided such reporting
covenants are complied with on or prior to February 14,
2007.(4)
    
    Amendments to provisions relating to the permitted uses of
the proceeds of revolving loans under the Credit Agreement
that (i) increase to $500 million from $350 million the
aggregate principal amount of revolving loans that may be
outstanding, the proceeds of which may be used to satisfy
the obligations under the Companys 4.70% Senior Notes due
2010 or 5.20% Senior Notes due 2015 and (ii) until June 30,
2007, decrease to $200 million from $300 million the
minimum liquidity (i.e., the aggregate amount of the
Companys unrestricted cash in excess of $50 million and
availability under the Credit Agreements revolving
facility) required after giving effect to such use of
proceeds.
 17




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Senior Notes
       18




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##### Table of Contents



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




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 9. EARNINGS PER SHARE
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    

2005(as
restated)
    
    
    2006
    
    
    2005(as
restated)Numerator:Income available to common stockholders
    
    $
    72,074
    
    
    $
    102,370
    
    
    $
    133,457
    
    
    $
    195,745Denominator:Basic weighted average shares outstanding
    
    
    98,914
    
    
    
    124,849
    
    
    
    101,183
    
    
    
    125,139Dilutive effect of stock options
    
    
    1,238
    
    
    
    2,077
    
    
    
    1,274
    
    
    
    1,967Denominator for earnings per share assuming dilution
    
    
    100,152
    
    
    
    126,926
    
    
    
    102,457
    
    
    
    127,106Basic earnings per share
    
    $
    0.73
    
    
    $
    0.82
    
    
    $
    1.32
    
    
    $
    1.56Diluted earnings per share
    
    $
    0.72
    
    
    $
    0.81
    
    
    $
    1.30
    
    
    $
    1.54
   10. COMPREHENSIVE INCOME
  20




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    

2005(as restated)
    
    
    2006
    
    

2005(as restated)Net income
    
    $
    72,074
    
    
    $
    102,370
    
    
    $
    133,457
    
    
    $
    195,745Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    5,597
    
    
    
    (3,385
    )
    
    
    8,312
    
    
    
    (3,610
    )Amortization of unrealized loss on
forward interest rate agreements (net
of income tax of $0.2 million, $0.2
million, $0.5 million and $0.4
million, respectively)
    
    
    397
    
    
    
    397
    
    
    
    793
    
    
    
    794Unrealized gains on foreign exchange
forward agreements (net of income tax
of $0.2 million, $0.2 million, $0.4
million and $0.2 million,
respectively)
    
    
    379
    
    
    
    277
    
    
    
    738
    
    
    
    277Comprehensive income
    
    $
    78,447
    
    
    $
    99,659
    
    
    $
    143,300
    
    
    $
    193,206
    As of
    
    
    As ofDecember 31, 2006
    
    
    June 30, 2006Foreign currency gains (losses)
    
    $
    7,886
    
    
    $
    (426
    )Unrealized loss on forward interest rate agreements
(net of
income tax of $5.6 million and $6.1 million,
respectively)
    
    
    (9,408
    )
    
    
    (10,201
    )Unrealized gains (losses) on foreign exchange forward
agreements (net of income tax of $253 and ($193),
respectively)
    
    
    422
    
    
    
    (316
    )Total
    
    $
    (1,100
    )
    
    $
    (10,943
    )
 21




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 11. FINANCIAL INSTRUMENTS
  12. PENSION AND OTHER POST-EMPLOYMENT PLANS
 Net periodic benefit cost
 Three Months endedDecember 31,2006
    
    
    2005Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.U.S. Plan
    
    
    Plans
    
    
    Plan
    
    
    PlansComponents of net periodic benefit cost:Defined benefit plans:Service cost
    
    $
    834
    
    
    $
    1,510
    
    
    $
    345
    
    
    $
    1,155Interest cost
    
    
    63
    
    
    
    1,426
    
    
    
    10
    
    
    
    1,160Expected return on assets
    
    
    (54
    )
    
    
    (1,366
    )
    
    
    (15
    )
    
    
    (1,218
    )Amortization of gains/losses
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service costs
    
    
    63
    
    
    
    
    
    
    
    20
    
    
    
    Net periodic benefit cost for defined benefit plans
    
    $
    900
    
    
    $
    1,570
    
    
    $
    360
    
    
    $
    1,097
 Six Months endedDecember 31,2006
    
    
    2005Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.U.S. Plan
    
    
    Plans
    
        Plan
    
    
    PlansComponents of net periodic benefit cost:Defined benefit plans:Service cost
    
    $
    1,758
    
    
    $
    2,894
    
    
    $
    345
    
    
    $
    2,565Interest cost
    
    
    126
    
    
    
    2,792
    
    
    
    10
    
    
    
    2,326Expected return on assets
    
    
    (108
    )
    
    
    (2,708
    )
    
    
    (15
    )
    
    
    (2,445
    )Amortization of gains/losses
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service costs
    
    
    126
    
    
    
    
    
    
    
    20
    
    
    
    Net periodic benefit cost for defined benefit plans
    
    $
    1,890
    
    
    $
    2,978
    
    
    $
    360
    
    
    $
    2,446
 Contributions
 22




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 13. SEGMENT INFORMATION
  Commercial
    
    
    Government
    
    
    Corporate
    
    
    ConsolidatedThree
months ended December 31, 2006Revenues (a)
    
    $
    858,103
    
    
    $
    568,658
    
    
    $
    
    
    
    $
    1,426,761Operating expenses (excluding
depreciation and amortization)
    
    
    706,289
    
    
    
    442,808
    
    
    
    42,108
    
    
    
    1,191,205Depreciation and amortization
    
    
    61,755
    
    
    
    23,116
    
    
    
    357
    
    
    
    85,228Operating income
    
    $
    90,059
    
    
    $
    102,734
    
    
    $
    (42,465
    )
    
    $
    150,328Three
months ended December 31, 2005(as
restated)Revenues (a)
    
    $
    784,767
    
    
    $
    562,820
    
    
    $
    
    
    
    $
    1,347,587Operating expenses (excluding
depreciation and amortization)
    
    
    650,829
    
    
    
    449,099
    
    
    
    31,558
    
    
    
    1,131,486Gain on sale of business
    
    
    
    
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Depreciation and amortization
    
    
    47,544
    
    
    
    22,514
    
    
    
    386
    
    
    
    70,444Operating income
    
    $
    86,394
    
    
    $
    120,972
    
    
    $
    (31,944
    )
    
    $
    175,422Six
months ended December 31, 2006Revenues (a)
    
    $
    1,699,805
    
    
    $
    1,112,394
    
    
    $
    
    
    
    $
    2,812,199Operating expenses (excluding
depreciation and amortization)
    
    
    1,415,926
    
    
    
    868,642
    
    
    
    69,579
    
    
    
    2,354,147Depreciation and amortization
    
    
    119,067
    
    
    
    47,087
    
    
    
    712
    
    
    
    166,866Operating income
    
    $
    164,812
    
    
    $
    196,665
    
    
    $
    (70,291
    )
    
    $
    291,186Six
months ended December 31, 2005(as restated)Revenues (a)
    
    $
    1,550,773
    
    
    $
    1,107,731
    
    
    $
    
    
    
    $
    2,658,504Operating expenses (excluding
depreciation and amortization)
    
    
    1,287,383
    
    
    
    871,775
    
    
    
    60,968
    
    
    
    2,220,126Gain on sale of business
    
    
    
    
    
    
    (29,765
    )
    
    
    
    
    
    
    (29,765
    )Depreciation and amortization
    
    
    92,630
    
    
    
    45,086
    
    
    
    808
    
    
    
    138,524Operating income
    
    $
    170,760
    
    
    $
    220,635
    
    
    $
    (61,776
    )
    
    $
    329,619
 
 (a)
    
    Revenues in our Government segment include revenues from operations divested during
fiscal year 2006 of $0.3 million and $47.8 million for the three months ended December 31,
2006 and 2005, respectively, and $0.9 million and $101.4 million for the six months ended
December 31, 2006 and 2005, respectively. 23




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 14. COMMITMENTS AND CONTINGENCIES
 Regulatory Agency Investigations Relating to Stock Option Grant Practices
   Lawsuits Related to Stock Option Grant Practices
 Dallas County District Court
 
    
    Merl Huntsinger, Derivatively on Behalf of Nominal Defendant
Affiliated Computer Services, Inc., Plaintiff, vs. Darwin Deason, Mark
A. King, J. Livingston Kosberg, Dennis McCuistion, Joseph P. ONeill,
Jeffrey A. Rich and Frank A. Rossi, Defendants, and Affiliated
Computer Services, Inc., Nominal Defendant, Cause No. 06-03403 in the
District Court of Dallas County, Texas, 193rd Judicial
District filed on April 7, 2006.
    
    Robert P. Oury, Derivatively on Behalf of Nominal Defendant Affiliated
Computer Services, Inc., Plaintiff, vs. Darwin Deason, Mark A. King,
J. Livingston Kosberg, Dennis McCuistion, Joseph P. ONeill, Jeffrey
A. Rich and Frank A. Rossi, and Affiliated Computer Services, Inc.,
Nominal Defendant, Cause No. 06-03872 in the District Court of Dallas
County, Texas, 193rd Judicial District filed on April 21,
2006.
    
    Anchorage Police & Fire Retirement System, derivatively on behalf of
nominal defendant Affiliated Computer Services Inc., Plaintiff v.
Jeffrey Rich; Darwin Deason; Mark King; Joseph ONeill; Frank Rossi;
Dennis McCuiston; J. Livingston Kosberg; Gerald Ford; Clifford
Kendall; David Black; Henry Hortenstine; Peter Bracken; William
Deckelman; Affiliated Computer Services Inc. Cause No. 06-5265-A in
the District Court of Dallas County, Texas, 14th Judicial
District filed on June 2, 2006.
 In Re Affiliated Computer
Services, Inc. Derivative Litigation
 U.S. District Court of Delaware
 
    
    Jeffrey T. Strauss, derivatively on behalf of
Affiliated Computer Services Inc. v. Jeffrey A.
Rich; Mark A. King; and Affiliated Computer
Services, Inc., as defendants  U.S. District
Court of Delaware, Cause No. 06-318, filed on May
16, 2006.
 Delaware Chancery Court
 
    
    Jan Brandin, in the Right of and for the Benefit
of Affiliated Computer Services, Inc., Plaintiff,
vs. Darwin Deason, Jeffrey A. Rich, Mark A. King,
Joseph ONeill and Frank Rossi, Defendants, and
Affiliated Computer Services, Inc., Nominal
Defendant, Civil Action No. CA2123-N, pending
before the Court of Chancery of the State of
Delaware in and for New Castle County, filed on
May 2, 2006.
 24




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 U.S. District Court, Northern District of Texas
 
    
    Alaska Electrical Fund, derivatively on behalf of
Affiliated Computer Services Inc. v. Jeffrey
Rich; Joseph ONeill; Frank A. Rossi; Darwin
Deason; Mark King; Lynn Blodgett; J. Livingston
Kosberg; Dennis McCuistion; Warren Edwards; John
Rexford and John M. Brophy, Defendants, and
Affiliated Computer Services, Inc., Nominal
Defendant, U.S. District Court, Northern District
of Texas, Dallas Division, Cause No.
3-06CV1110-M, filed on June 22, 2006.
    
    Bennett Ray Lunceford and Ann M. Lunceford,
derivatively on behalf of Affiliated Computer
Services Inc. v. Jeffrey Rich; Joseph ONeill;
Frank A. Rossi; Darwin Deason; Mark King; Lynn
Blodgett; J. Livingston Kosberg; Dennis
McCuiston; Warren Edwards; John Rexford and John
M. Brophy, Defendants, and Affiliated Computer
Services, Inc., Nominal Defendant, U.S. District
Court, Northern District of Texas, Dallas
Division, Cause No. 3-06CV1212-M, filed on July
7, 2006.
 In Re Affiliated
Computer Services Derivative Litigation
  U.S. District Court of Texas, Northern District of Texas
 
    
    Terri Simeon, on behalf of Herself and All Others Similarly
Situated, Plaintiff, vs. Affiliated Computer Services, Inc.,
Darwin Deason, Mark A. King, Lynn R. Blodgett, Jeffrey A. Rich,
Joseph ONeill, Frank Rossi, J. Livingston Kosberg, Dennis
McCuistion, The Retirement Committee of the ACS Savings Plan, and
John Does 1-30, Defendants, U. S. District Court, Northern
District of Texas, Dallas Division, Civil Action No. 306-CV-1592P
filed August 31, 2006.
 
    
    Kyle Burke, Individually and on behalf of All Others Similarly
Situated, Plaintiff, vs. Affiliated Computer Services, Inc., the
ACS Administrative Committee, Lora Villarreal, Kellar Nevill,
Gladys Mitchell, Meg Cino, Mike Miller, John Crysler, Van Johnson,
Scott Bell, Anne Meli, David Lotocki, Randall Booth, Pam Trutna,
Brett Jakovac, Jeffrey A. Rich, Mark A. King, Darwin Deason,
Joseph P. ONeill and J. Livingston Kosberg, U. S. District Court,
Northern District of Texas, Dallas Division, Case No.
306-CV-02379-M.
   Declaratory Action with Respect to Alleged Default and Purported Acceleration of our Senior Notes
and Amendment, Consent and Waiver for our Credit Facility
 Investigation Regarding Photo Enforcement Contract in Edmonton, Alberta, Canada
 25




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Investigation Concerning Procurement Process at Hanscom Air Force Base
 Investigation Regarding Certain Child Support Payment Processing Contracts
 Investigation regarding Florida Workforce Contracts
 26




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  QUI TAM
 Other
     27




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    DEPARTURE OF EXECUTIVE OFFICERS
   28




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   16. NEW ACCOUNTING PRONOUNCEMENTS
   29




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   17. RELATED PARTY TRANSACTIONS
  18. SUBSEQUENT EVENT
 Contract with the Department of Education
  30




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW
    31




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REVIEW OF STOCK OPTION GRANT PRACTICES






32



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##### Table of Contents



33




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##### Table of Contents



 
   
    
    The stock options held by our employees (other than Messrs. King and Edwards and one
management employee) will be adjusted as necessary, with the optionees consent, to avoid
adverse tax consequences to the employee, and we will compensate such employees for any
increase in exercise price resulting from the matters which were the subject of the
internal investigation.
    
    Our non-employee directors, to avoid the appearance of inappropriate gain, voluntarily
agreed that with respect to any historical option grants to them which require incremental
compensation expense as a result of revised measurement dates, the exercise price will be
increased to equal the fair market value of the stock on the revised measurement date,
regardless of whether such increase is necessary to avoid adverse tax consequences to the
director. The non-employee directors will not be reimbursed to offset any individual loss
of economic benefit related to such repriced stock options.
    
    Another employee (not an officer as defined in Rule 16a-1(f) under the Securities
Exchange Act of 1934) will be reassigned and all of such employees stock options will be
repriced so that the exercise price equals the fair market value of our stock on the proper
measurement date.
 34




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##### Table of Contents




    
    We will consider whether to recover certain profits from Jeffrey A. Rich, former Chief
Executive Officer, which relate to stock options awarded to Mr. Rich which the internal
investigation concluded were awarded through a process in which favorable grant dates were
selected after the fact.
    
    We implemented, or are in the process of implementing, a number of changes to our
internal controls, including:
 o
    
    After reviewing the results of the investigation to date, our Board of
Directors determined that it would be appropriate to accept the resignations of Mr.
King and Mr. Edwards. Our Board of Directors has since appointed a new Chief
Executive Officer and Chief Financial Officer.o
    
    Designating internal legal and accounting staffs to oversee the
documentation and accounting of all grants of stock options or restricted stock.o
    
    Monitoring industry and regulatory developments in stock option and
restricted stock awards and implementing and maintaining best practices with respect
to grants of stock options or restricted stock.o
    
    Adhering to the practice of making annual grants on a date certain and
through board or committee meetings, and not through a unanimous written consent
process.
    35




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##### Table of Contents



Decrease in cumulative net income and retained earnings:Stock-based compensation expense
    
    $
    (51,207
    )Estimated tax related penalties and interest on underpayment
deficiencies resulting from disallowed Section 162(m)
executive compensation deductions
    
    
    (11,562
    )Decrease in pretax profit
    
    
    (62,769
    )Income tax benefit, net
    
    
    12,918Decrease in cumulative net income and retained earnings
    
    
    
    
    
    $
    (49,851
    )Increase to additional paid-in capital:Stock-based compensation expense
    
    
    51,207Reduction of excess tax benefits for stock options
exercised, due to revised measurement dates (1)
    
    
    (10,210
    )Reduction of excess tax benefits for certain stock options
exercised related to disallowed Section 162(m) executive
compensation deductions, due to revised measurement dates
(2)
    
    
    (13,372
    )Reduction of excess tax benefits for certain stock options
exercised related to disallowed executive compensation
deductions previously believed to qualify for Section 162(m)
exceptions, due to factors unrelated to revised measurement
dates (3)
    
    
    (10,505
    )Increase in additional paid-in capital
    
    
    
    
    
    
    17,120Decrease in stockholders equity at June 30, 2006
    
    
    
    
    
    $
    (32,731
    )
 
 (1)
    
    We recorded cumulative deferred income tax benefits of $15.3 million for the income tax
effect related to the stock-based compensation expense adjustments arising from revised
measurement dates, of which $10.2 million has been realized through June 30, 2006 upon stock
option exercises and has been reflected as a reduction of excess tax benefits previously
recorded in additional paid-in capital.(2)
    
    Excess tax benefits for certain stock-based executive compensation deductions from stock
option exercises previously recorded in additional paid-in capital are now disallowed under
Section 162(m) due to revised measurement dates of certain stock option grants. See Other Tax
Matters below in this discussion of Review of Stock Option Grant Practices.(3)
    
    Excess tax benefits for certain stock-based executive compensation deductions from stock
option exercises previously recorded in additional paid-in capital may now be non-deductible
under Section 162(m) as a result of information obtained by us in connection with our internal
investigation, due to factors unrelated to revised measurement dates. See Other Tax Matters
below in this discussion of Review of Stock Option Grant Practices. 36




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##### Table of Contents



IncomeStock-based
    
    Estimated
    
    taxcompensation
    
    interest and
    
    benefit,
    
    Totalexpense
    
    penalties (1)
    
    net
    
    adjustmentsYears ended June 30,1995
    




    $
    (63
    )
    
    $
    
    
    
    $
    23
    
    
    $
    (40
    )1996
    




    
    (444
    )
    
    
    
    
    
    
    130
    
    
    
    (314
    )1997
    




    
    (1,404
    )
    
    
    
    
    
    
    301
    
    
    
    (1,103
    )1998
    




    
    (1,876
    )
    
    
    
    
    
    
    405
    
    
    
    (1,471
    )1999
    




    
    (3,325
    )
    
    
    
    
    
    
    717
    
    
    
    (2,608
    )2000
    




    
    (4,870
    )
    
    
    (87
    )
    
    
    511
    
    
    
    (4,446
    )2001
    




    
    (6,433
    )
    
    
    (546
    )
    
    
    1,074
    
    
    
    (5,905
    )2002
    




    
    (7,833
    )
    
    
    (1,414
    )
    
    
    1,636
    
    
    
    (7,611
    )2003
    




    
    (9,237
    )
    
    
    (1,454
    )
    
    
    2,119
    
    
    
    (8,572
    )Cumulative effect at June 30, 2003
    




    
    (35,485
    )
    
    
    (3,501
    )
    
    
    6,916
    
    
    
    (32,070
    )Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Netincome as
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    income asreported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    restatedYears ended June 30,2004
    
    $
    529,843
    
    
    
    (7,527
    )
    
    
    (2,509
    )
    
    
    1,921
    
    
    
    (8,115
    )
    
    $
    521,7282005
    
    
    415,945
    
    
    
    (6,061
    )
    
    
    (2,526
    )
    
    
    2,211
    
    
    
    (6,376
    )
    
    
    409,5692006
    
    
    
    
    
    
    (2,134
    )
    
    
    (3,026
    )
    
    
    1,870
    
    
    
    (3,290
    )Cumulative effect
at June 30, 2006
    
    
    
    
    
    $
    (51,207
    )
    
    $
    (11,562
    )
    
    $
    12,918
    
    
    $
    (49,851
    )
 
     37




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##### Table of Contents



Currentincome taxexpense onDeferred
    
    
    Current
    
    
    disallowedincome tax
    
    
    income tax
    
    
    deductionsbenefit on
    
    
    benefit on
    
    
    understock-based
    
    
    deductible
    
    
    Section
    
    
    Income taxcompensation
    
    
    interest
    
    
    162(m)
    
    
    benefit, netYears ended June 30,1995
    
    $
    23
    
    
    $
    
    
    
    $
    
    
    
    $
    231996
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    1301997
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    3011998
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    4051999
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    7172000
    
    
    945
    
    
    
    
    
    
    
    (434
    )
    
    
    5112001
    
    
    1,598
    
    
    
    
    
    
    
    (524
    )
    
    
    1,0742002
    
    
    2,287
    
    
    
    
    
    
    
    (651
    )
    
    
    1,6362003
    
    
    3,246
    
    
    
    70
    
    
    
    (1,197
    )
    
    
    2,119Cumulative effect at June 30, 2003
    
    
    9,652
    
    
    
    70
    
    
    
    (2,806
    )
    
    
    6,916Years ended June 30,2004
    
    
    2,702
    
    
    
    387
    
    
    
    (1,168
    )
    
    
    1,9212005
    
    
    2,194
    
    
    
    576
    
    
    
    (559
    )
    
    
    2,2112006
    
    
    774
    
    
    
    1,096
    
    
    
    
    
    
    
    1,870Cumulative effect at June 30, 2006
    
    $
    15,322
    
    
    $
    2,129
    
    
    $
    (4,533
    )
    
    $
    12,918
 Other tax matters
   38




---



##### Table of Contents



DEPARTURE OF EXECUTIVE OFFICERS
    39




---



##### Table of Contents



SIGNIFICANT DEVELOPMENTS
 New Business
 Acquisitions
  Review of Stock Option Grant Practices
 Departure of Executive Officers
 Credit Arrangements  Credit Facility
 Senior Notes
 Restructuring and other activities
 40




---



##### Table of Contents



Balance at September 30, 2006
    
    $
    5,050Accrual recorded
    
    
    2Payments
    
    
    (3,915
    )Balance at December 31, 2006
    
    $
    1,137Balance at June 30, 2006
    
    $
    899Accrual recorded
    
    
    5,060Payments
    
    
    (4,822
    )Balance at December 31, 2006
    
    $
    1,137
   Share Repurchase Programs
 41




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##### Table of Contents



Stock option grants
 Related Party Transactions
 SUBSEQUENT EVENT
 Contract with the Department of Education
  42




---



##### Table of Contents



REVENUE GROWTH
  Three months ended December 31,
    
    
    Six months ended December 31,2006
    
    
    2005
    
    
    $ Growth
    
    
    Growth %
    
    
    2006
    
    
    2005
    
    
    $ Growth
    
    
    Growth %ConsolidatedTotal Revenues
    
    $
    1,426,761
    
    
    $
    1,347,587
    
    
    $
    79,174
    
    
    
    6
    %
    
    $
    2,812,199
    
    
    $
    2,658,504
    
    
    $
    153,695
    
    
    
    6
    %Less: Divestitures
    
    
    (271
    )
    
    
    (47,751
    )
    
    
    47,480
    
    
    
    
    
    
    
    (856
    )
    
    
    (101,369
    )
    
    
    100,513Adjusted
    
    $
    1,426,490
    
    
    $
    1,299,836
    
    
    $
    126,654
    
    
    
    10
    %
    
    $
    2,811,343
    
    
    $
    2,557,135
    
    
    $
    254,208
    
    
    
    10
    %Acquired revenues
    
    $
    92,713
    
    
    $
    15,333
    
    
    $
    77,380
    
    
    
    6
    %
    
    $
    169,901
    
    
    $
    15,333
    
    
    $
    154,568
    
    
    
    6
    %Internal revenues
    
    
    1,333,777
    
    
    
    1,284,503
    
    
    
    49,274
    
    
    
    4
    %
    
    
    2,641,442
    
    
    
    2,541,802
    
    
    
    99,640
    
    
    
    4
    %Total
    
    $
    1,426,490
    
    
    $
    1,299,836
    
    
    $
    126,654
    
    
    
    10
    %
    
    $
    2,811,343
    
    
    $
    2,557,135
    
    
    $
    254,208
    
    
    
    10
    %CommercialTotal Revenues
    
    $
    858,103
    
    
    $
    784,767
    
    
    $
    73,336
    
    
    
    9
    %
    
    $
    1,699,805
    
    
    $
    1,550,773
    
    
    $
    149,032
    
    
    
    10
    %Less: Divestitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted
    
    $
    858,103
    
    
    $
    784,767
    
    
    $
    73,336
    
    
    
    9
    %
    
    $
    1,699,805
    
    
    $
    1,550,773
    
    
    $
    149,032
    
    
    
    10
    %Acquired revenues
    
    $
    46,545
    
    
    $
    
    
    
    $
    46,545
    
    
    
    6
    %
    
    $
    77,733
    
    
    $
    
    
    
    $
    77,733
    
    
    
    5
    %Internal revenues
    
    
    811,558
    
    
    
    784,767
    
    
    
    26,791
    
    
    
    3
    %
    
    
    1,622,072
    
    
    
    1,550,773
    
    
    
    71,299
    
    
    
    5
    %Total
    
    $
    858,103
    
    
    $
    784,767
    
    
    $
    73,336
    
    
    
    9
    %
    
    $
    1,699,805
    
    
    $
    1,550,773
    
    
    $
    149,032
    
    
    
    10
    %GovernmentTotal Revenues
    
    $
    568,658
    
    
    $
    562,820
    
    
    $
    5,838
    
    
    
    1
    %
    
    $
    1,112,394
    
    
    $
    1,107,731
    
    
    $
    4,663
    
    
    
    0
    %Less: Divestitures
    
    
    (271
    )
    
    
    (47,751
    )
    
    
    47,480
    
    
    
    
    
    
    
    (856
    )
    
    
    (101,369
    )
    
    
    100,513Adjusted
    
    $
    568,387
    
    
    $
    515,069
    
    
    $
    53,318
    
    
    
    10
    %
    
    $
    1,111,538
    
    
    $
    1,006,362
    
    
    $
    105,176
    
    
    
    10
    %Acquired revenues
    
    $
    46,168
    
    
    $
    15,333
    
    
    $
    30,835
    
    
    
    6
    %
    
    $
    92,168
    
    
    $
    15,333
    
    
    $
    76,835
    
    
    
    7
    %Internal revenues
    
    
    522,219
    
    
    
    499,736
    
    
    
    22,483
    
    
    
    4
    %
    
    
    1,019,370
    
    
    
    991,029
    
    
    
    28,341
    
    
    
    3
    %Total
    
    $
    568,387
    
    
    $
    515,069
    
    
    $
    53,318
    
    
    
    10
    %
    
    $
    1,111,538
    
    
    $
    1,006,362
    
    
    $
    105,176
    
    
    
    10
    %
 43




---



##### Table of Contents



RESULTS OF OPERATIONS
   Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
(as restated)
    
    

2006
    
    

2005(as restated)Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Cost of revenues:Wages and benefits
    
    
    46.8
    
    
    
    47.1
    
    
    
    47.4
    
    
    
    47.4Services and supplies
    
    
    22.3
    
    
    
    22.7
    
    
    
    21.7
    
    
    
    22.5Rent, lease and maintenance
    
    
    12.4
    
    
    
    12.1
    
    
    
    12.7
    
    
    
    12.0Depreciation and amortization
    
    
    6.0
    
    
    
    5.2
    
    
    
    5.9
    
    
    
    5.2Other
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.5Total cost of revenues
    
    
    88.1
    
    
    
    87.6
    
    
    
    88.4
    
    
    
    87.6Gain on sale of business
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    (1.1
    )Other operating expenses
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.2
    
    
    
    1.1Total operating expenses
    
    
    89.5
    
    
    
    87.0
    
    
    
    89.6
    
    
    
    87.6Operating income
    
    
    10.5
    
    
    
    13.0
    
    
    
    10.4
    
    
    
    12.4Interest expense
    
    
    3.4
    
    
    
    1.1
    
    
    
    3.4
    
    
    
    1.1Other non-operating income, net
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (0.3
    )Pretax profit
    
    
    7.8
    
    
    
    12.1
    
    
    
    7.4
    
    
    
    11.6Income tax expense
    
    
    2.7
    
    
    
    4.5
    
    
    
    2.7
    
    
    
    4.2Net income
    
    
    5.1
    %
    
    
    7.6
    %
    
    
    4.7
    %
    
    
    7.4
    %
 COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2006 TO THE THREE MONTHS ENDED DECEMBER 31, 2005
 Revenues
   44




---



##### Table of Contents



Operating Expenses
      45




---



##### Table of Contents



For the three months endingDecember 31,2006
    
    
    2005Government segment:Provision for estimated legal settlement
and uncollectible accounts receivable
related to the welfare-to-workforce
services business
    
    $
    
    
    
    $
    3.3Corporate segment:Aircraft impairment
    
    
    
    
    
    
    4.1Legal settlements and related costs
    
    
    
    
    
    
    3.2Legal costs associated with the
ongoing stock option investigations and
shareholder derivative lawsuits
    
    
    13.3
    
    
    
    Legal 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
    
    
    
    
    
    
    2.6Total
    
    $
    13.3
    
    
    $
    13.2As a percentage of revenue
    
    
    1.0
    %
    
    
    0.9
    %
 46




---



##### Table of Contents



Operating Income
 For the three months endingDecember 31,2006
    
    
    2005Commercial segment:Costs related to our restructuring activities
    
    $
    
    
    
    $
    (4.6
    )Government segment:Gain on sale of Government welfare-to-workforce services business
    
    
    
    
    
    
    29.8Provision for estimated legal settlement and uncollectible
accounts receivable related to the welfare-to-workforce services
business
    
    
    
    
    
    
    (3.3
    )Costs related to our restructuring activities
    
    
    
    
    
    
    (1.7
    )Corporate segment:Aircraft impairment
    
    
    
    
    
    
    (4.1
    )Legal and other costs associated with the
ongoing stock option investigations and
shareholder derivative lawsuits
    
    
    (13.8
    )
    
    
    Legal settlements and related costs
    
    
    
    
    
    
    (3.2
    )Legal 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
    
    
    
    
    
    
    (2.7
    )Total
    
    $
    (13.8
    )
    
    $
    10.2As a percentage of revenue
    
    
    (1.0
    %)
    
    
    0.8
    %
 Interest Expense
 Other non-operating income, net
 Income tax expense
 COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2006 TO THE SIX MONTHS ENDED DECEMBER 31, 2005
 Revenues
 47




---



##### Table of Contents



Operating Expenses
      48




---



##### Table of Contents



For the six months endingDecember 31,2006
    
    
    2005Commercial segment:Provision for doubtful accounts for an
assessment of risk related to the
bankruptcies of certain airline clients
    
    $
    
    
    
    $
    3.0Government segment:Provision for estimated legal settlement
and uncollectible accounts receivable
related to the welfare-to-workforce
services business
    
    
    
    
    
    
    3.3Corporate segment:Aircraft impairment
    
    
    
    
    
    
    4.1Legal settlements and related costs
    
    
    
    
    
    
    3.2Legal costs associated with the ongoing
stock option investigations and
shareholder derivative lawsuits
    
    
    21.0
    
    
    
    Legal 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
    
    
    
    
    
    
    2.6Total
    
    $
    21.0
    
    
    $
    16.2As a percentage of revenue
    
    
    0.7
    %
    
    
    0.6
    %
 49




---



##### Table of Contents



Operating Income
 For the six months endingDecember 31,2006
    
    
    2005Commercial segment:Costs related to our restructuring activities
    
    $
    (5.6
    )
    
    $
    (4.6
    )Asset impairments and other charges
    
    
    (2.1
    )
    
    
    Provision for doubtful accounts for an assessment of risk
related to the bankruptcies of certain airline clients
    
    
    
    
    
    
    (3.0
    )Government segment:Gain on sale of Government welfare-to-workforce services business
    
    
    
    
    
    
    29.8Provision for estimated legal settlement and uncollectible
accounts receivable related to the welfare-to-workforce services
business
    
    
    
    
    
    
    (3.3
    )Cost related to our restructuring activities
    
    
    (0.4
    )
    
    
    (1.7
    )Corporate segment:Aircraft impairment
    
    
    
    
    
    
    (4.1
    )Legal and other costs associated with the ongoing stock option
investigations and shareholder derivative lawsuits
    
    
    (21.7
    )
    
    
    Compensation expense related to the departure of Jeffrey A.
Rich, our former Chief Executive Officer
    
    
    
    
    
    
    (5.4
    )Legal settlements and related costs
    
    
    
    
    
    
    (3.2
    )Legal 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
    
    
    
    
    
    
    (2.7
    )Total
    
    $
    (29.8
    )
    
    $
    1.8As a percentage of revenue
    
    
    (1.1
    %)
    
    
    0.1
    %
 Interest Expense
 Other non-operating income, net
 Income tax expense
 50




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
   Six months endedDecember 31,2006
    
    

2005As restatedNet cash provided by operating activities
    
    $
    304,714
    
    
    $
    357,571Purchases of property, equipment and software, net
    
    
    (170,441
    )
    
    
    (184,973
    )Additions to other intangible assets
    
    
    (14,969
    )
    
    
    (13,046
    )Free cash flow
    
    $
    119,304
    
    
    $
    159,552
   51




---



##### Table of Contents



Credit Facility
     (1)
    
    Consent to the delivery, on or prior to February 14, 2007,
of (i) the financial statements, accountants report and
compliance certificate for the fiscal year ended June 30,
2006 and (ii) financial statements and related compliance
certificates for the fiscal quarters ended June 30, 2006
and September 30, 2006, and waiver of any default arising
from the failure to deliver any such financial statements,
reports or certificates within the applicable time period
provided for in the Credit Agreement, provided that any
such failure to deliver resulted directly or indirectly
from the previously announced investigation of the
Companys historical stock option grant practices (the
Options Matter).(2)
    
    Waiver of any default or event of default arising from the
incorrectness of representations and warranties made or
deemed to have been made with respect to certain financial
statements previously delivered to the Agent as a result of
any restatement, adjustment or other modification of such
financial statements resulting directly or indirectly from
the Options Matter.(3)
    
    Waiver of any default or event of default which may arise
from the Companys or its subsidiaries failure to comply
with reporting covenants under other indebtedness that are
similar to those in the Credit Agreement (including any
covenant to file any report with the Securities and
Exchange Commission or to furnish such reports to the
holders of such indebtedness), provided such reporting
covenants are complied with on or prior to February 14,
2007.(4)
    
    Amendments to provisions relating to the permitted uses of
the proceeds of revolving loans under the Credit Agreement
that (i) increase to $500 million from $350 million the
aggregate principal amount of revolving loans that may be
outstanding, the proceeds of which may be used to satisfy
the obligations under the Companys 4.70% Senior Notes due
2010 or 5.20% Senior Notes due 2015 and (ii) until June 30,
2007, decrease to $200 million from $300 million the
minimum liquidity (i.e., the aggregate amount of the
Companys unrestricted cash in excess of $50 million and
availability under the Credit Agreements revolving
facility) required after giving effect to such use of
proceeds.
  Senior Notes
 52




---



##### Table of Contents



Other credit arrangements
 53




---



##### Table of Contents



Credit Ratings
 Derivative instruments and hedging activities
  Share Repurchase Programs
 Other
 54




---



##### Table of Contents



DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2006 (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)
    
    $
    499,408
    
    
    $
    
    
    
    $
    
    
    
    $
    249,941
    
    
    $
    249,467Long-term debt (1)
    
    
    2,063,851
    
    
    
    19,588
    
    
    
    36,062
    
    
    
    36,067
    
    
    
    1,972,134Capital lease obligations (1)
    
    
    47,729
    
    
    
    24,824
    
    
    
    22,634
    
    
    
    271
    
    
    
    Operating leases (2)
    
    
    1,184,215
    
    
    
    323,175
    
    
    
    512,384
    
    
    
    272,571
    
    
    
    76,085Purchase obligations (3) (4)
    
    
    39,834
    
    
    
    16,047
    
    
    
    23,787
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    $
    3,835,037
    
    
    $
    383,634
    
    
    $
    594,867
    
    
    $
    558,850
    
    
    $
    2,297,686Total
    
    Amount of Commitment Expiration per PeriodAmounts
    
    Less thanOther Commercial Commitments
    
    Committed
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsStandby letters of credit
    
    $
    140,719
    
    
    $
    140,719
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    523,699
    
    
    
    453,875
    
    
    
    46,126
    
    
    
    21,836
    
    
    
    1,862Total Commercial Commitments
    
    $
    664,418
    
    
    $
    594,594
    
    
    $
    46,126
    
    
    $
    21,836
    
    
    $
    1,862
 
 (1)
    
    Excludes accrued interest of $20.2 million at December 31, 2006.(2)
    
    We have various contractual commitments to lease hardware and software and for the
purchase of maintenance on such leased assets with varying terms through fiscal year 2013,
which are included in operating leases in the table.(3)
    
    We have entered into various contractual agreements to purchase telecommunications
services. These agreements provide for minimum annual spending commitments, and have
varying terms through fiscal year 2010, and are included in purchase
obligations in the table. 55




---



##### Table of Contents



(4)
    
    We have entered into a two year agreement with Rich Capital, LLC, an M&A advisory
firm owned by Jeffery A. Rich, a former Chief Executive Officer, to provide us with
advisory services in connection with potential acquisition candidates. This contractual
obligation is included in purchase obligations in the table above. However, we have
currently suspended payment under this agreement pending determination whether Rich
Capital LLC is capable of performing its obligations under the contract in view of the
internal investigations conclusions regarding stock options awarded to Mr. Rich.      CRITICAL ACCOUNTING POLICIES
   56




---



##### Table of Contents



Revenue recognition
          57




---



##### Table of Contents



Cost of revenues
  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.
  58




---



##### Table of Contents



Pension and post-employment benefits
       As of June 30,2006
    
    2005OtherBenefit
    
    
    
    
    
    OtherPension Plans
    
    Plan
    
    Pension Plans
    
    Benefit PlanNon-U.S.
PlansDiscount rate
    
    
    5.00% - 5.75
    %
    
    
    5.75
    %
    
    
    5.00% - 5.25
    %
    
    
    5.25
    %Rate of increase in compensation levels
    
    
    4.25% - 4.40
    %
    
    
    N/A
    
    
    
    4.25% - 4.40
    %
    
    
    N/AU.S.
PlanDiscount rate
    
    
    6.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ARate of increase in compensation levels
    
    
    3.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 59




---



##### Table of Contents



For the year ended
    
    For the period from May 1, 2005June 30, 2006
    
    through June 30, 2005Other
    
    
    
    
    
    OtherPension Plans
    
    Benefit Plan
    
    Pension Plans
    
    Benefit PlanNon-U.S.
PlansDiscount rate
    
    
    5.00% - 5.75
    %
    
    
    5.75
    %
    
    
    5.25% - 5.75
    %
    
    
    5.75
    %Long-term rate of return on assets
    
    
    7.00% - 7.50
    %
    
    
    N/A
    
    
    
    7.00% - 7.50
    %
    
    
    N/ARate of increase in compensation levels
    
    
    4.25% - 4.40
    %
    
    
    N/A
    
    
    
    4.25% - 4.40
    %
    
    
    N/AU.S. PlanDiscount rate
    
    
    5.75
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ALong-term rate of return on assets
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ARate of increase in compensation levels
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  For the year ended
    
    For the period from May 1, 2005June 30, 2006
    
    through June 30, 2005Plus .25%
    
    Less .25%
    
    Plus .25%
    
    Less .25%Non-U.S. PlansEffect on pension benefit obligation
    
    $
    (5,055
    )
    
    $
    5,155
    
    
    $
    (4,490
    )
    
    $
    4,692Effect on service and interest cost
    
    $
    (432
    )
    
    $
    450
    
    
    $
    (380
    )
    
    $
    399U.S. PlanEffect on pension benefit obligation
    
    $
    (164
    )
    
    $
    174
    
    
    
    N/A
    
    
    
    N/AEffect on service and interest cost
    
    $
    (104
    )
    
    $
    110
    
    
    
    N/A
    
    
    
    N/A
    60




---



##### Table of Contents



For the year ended
    
    For the period from May 1,June 30, 2006
    
    2005 through June 30, 2005Plus 1%
    
    Less 1%
    
    Plus 1%
    
    Less 1%Effect on pension benefit obligation
    
    $
    30
    
    
    $
    (27
    )
    
    $
    55
    
    
    $
    (48
    )Effect on service and interest cost
    
    $
    4
    
    
    $
    (4
    )
    
    $
    7
    
    
    $
    (6
    )
 Allowance for doubtful accounts
  Income taxes
   NEW ACCOUNTING PRONOUNCEMENTS
    61




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    62




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Managements Evaluation of Disclosure Controls and Procedures
  Remediation
of Material Weaknesses in Internal Control over Financial Reporting
  1.
    
    After reviewing the results of the investigation to date, our Board of Directors
determined that it would be appropriate to accept the resignations of the prior Chief
Executive Officer and prior Chief Financial Officer. Our Board of Directors has since
appointed a new Chief Executive Officer and Chief Financial Officer.2.
    
    Designating internal legal and accounting staffs to oversee the documentation and
accounting of all grants of stock options or restricted stock.3.
    
    Adhering to the practice of making annual grants on a date certain and through
board or committee meetings, and not through a unanimous written consent process. This
process was implemented during the fourth quarter of fiscal 2006 and reported as a change
in Internal Control over Financial Reporting within our Annual Report on Form 10-K/A for
the fiscal year ended June 30, 2006.
 Changes in Internal Control over Financial Reporting
  1.
    
    The resignations of the prior Chief Executive Officer and prior Chief Financial
Officer have been accepted. Our Board of Directors has since appointed a new Chief
Executive Officer and Chief Financial Officer.2.
    
    Designating internal legal and accounting staffs to oversee the documentation and
accounting of all grants of stock options or restricted stock.
  63




---



##### Table of Contents



PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Maximum number (orTotal number of
    
    approximate dollarshares purchased
    
    value) of shares thatTotal number
    
    Average
    
    as part of publicly
    
    may yet be purchasedof shares
    
    price paid per
    
    announced plans
    
    under the plans orPeriod
    
    purchased
    
    share
    
    or programs
    
    programsInception through September 30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,000,000,000October 1  October 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000,000November 1  November 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000,000December 1  December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000,000Total  Quarter ended December 31,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000,000Inception through December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,000,000,000
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    64




---



##### Table of Contents



(1)
    
    Consent to the delivery, on or prior to February 14, 2007,
of (i) the financial statements, accountants report and
compliance certificate for the fiscal year ended June 30,
2006 and (ii) financial statements and related compliance
certificates for the fiscal quarters ended June 30, 2006
and September 30, 2006, and waiver of any default arising
from the failure to deliver any such financial statements,
reports or certificates within the applicable time period
provided for in the Credit Agreement, provided that any
such failure to deliver resulted directly or indirectly
from the previously announced investigation of the
Companys historical stock option grant practices (the
Options Matter).(2)
    
    Waiver of any default or event of default arising from the
incorrectness of representations and warranties made or
deemed to have been made with respect to certain financial
statements previously delivered to the Agent as a result of
any restatement, adjustment or other modification of such
financial statements resulting directly or indirectly from
the Options Matter.(3)
    
    Waiver of any default or event of default which may arise
from the Companys or its subsidiaries failure to comply
with reporting covenants under other indebtedness that are
similar to those in the Credit Agreement (including any
covenant to file any report with the Securities and
Exchange Commission or to furnish such reports to the
holders of such indebtedness), provided such reporting
covenants are complied with on or prior to February 14,
2007.(4)
    
    Amendments to provisions relating to the permitted uses of
the proceeds of revolving loans under the Credit Agreement
that (i) increase to $500 million from $350 million the
aggregate principal amount of revolving loans that may be
outstanding, the proceeds of which may be used to satisfy
the obligations under the Companys 4.70% Senior Notes due
2010 or 5.20% Senior Notes due 2015 and (ii) until June 30,
2007, decrease to $200 million from $300 million the
minimum liquidity (i.e., the aggregate amount of the
Companys unrestricted cash in excess of $50 million and
availability under the Credit Agreements revolving
facility) required after giving effect to such use of
proceeds.
  Senior Notes
    65




---



##### Table of Contents



ITEM 6. EXHIBITS
  66




---



##### Table of Contents



SIGNATURES
  AFFILIATED COMPUTER SERVICES, INC.By:
    /s/ John H. RexfordJohn H. RexfordExecutive Vice President and
Chief Financial Officer 67




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Name2.1
    
    Stock Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Corporation and Affiliated Computer Services,
Inc. (filed as Exhibit 10.1 to our Quarterly Report on Form
10-Q, filed November 14, 2003 and incorporated herein by
reference).2.2
    
    Asset Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Service, Inc. and Affiliated Computer Services,
Inc. (filed as Exhibit 10.2 to our Quarterly Report on Form
10-Q, filed November 14, 2003 and incorporated herein by
reference).2.3
    
    Purchase Agreement, dated as of March 15, 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 March 17, 2005 and incorporated herein by reference).2.4
    
    Amendment No. 1 to Purchase Agreement, dated as of May 25, 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 June 1, 2005 and incorporated herein
by reference).2.5
    
    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) filed as Exhibit 4.1
to our Current Report on Form 8-K filed May 19, 1999 and
incorporated herein by reference).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).
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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Name4.7
    
    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. (filed as
Exhibit 9.1 to our Quarterly Report on Form 10-Q filed February
9, 2006 and incorporated herein by reference).10.1
    
    Credit Agreement, dated March 20, 2006, by and among Affiliated
Computer Services, Inc., and certain subsidiary parties thereto,
as Borrowers, Citicorp USA, Inc., as Administrative Agent,
Citigroup Global Markets Inc., as Sole Lead Arranger and Book
Runner, and various other agents, lenders and issuers (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed March 21,
2006 and incorporated herein by reference).10.2
    
    Amendment No. 1 to Credit Agreement dated as of March 30, 2006,
by and among Affiliated Computer Services, Inc., and certain
subsidiary parties thereto, as Borrowers, and Citicorp USA,
Inc., as Administrative Agent (filed as Exhibit 10.25 to our
Annual Report on Form 10-K, filed January 23, 2007 and
incorporated herein by reference).10.3
    
    Amendment No. 2 to Credit Agreement dated as of July 6, 2006, by
and among Affiliated Computer Services, Inc., and certain
subsidiary parties thereto, as Borrowers, and Citicorp USA,
Inc., as Administrative Agent (filed as Exhibit 10.1 to our
Current Report on Form 8-K, filed July 7, 2006 and incorporated
herein by reference).10.4
    
    Amendment No. 3, Consent and Waiver to Credit Agreement, by and
among Affiliated Computer Services, Inc., and certain subsidiary
parties thereto and Citicorp USA, Inc., as Administrative Agent
(filed as Exhibit 10.1 to our Current Report on Form 8-K, filed
September 28, 2006 and incorporated herein by reference).10.5
    
    Amendment No. 4, Consent and Waiver to Credit Agreement, by and
among Affiliated Computer Services, Inc., and certain subsidiary
parties thereto and Citicorp USA, Inc., as Administrative Agent
(filed as Exhibit 10.1 to our Current Report on Form 8-K, filed
December 22, 2006 and incorporated herein by reference).10.6
    
    1997 Stock Incentive Plan for Employees in France (filed as
Exhibit 10.35 to our Annual Report on Form 10-K, filed January
23, 2007 and incorporated herein by reference).10.7
    
    Form of Stock Option Agreement (France) (filed as Exhibit 10.36
to our Annual Report on Form 10-K, filed January 23, 2007, and
incorporated herein by reference).10.8
    
    Separation Agreement dated as of November 26, 2006 between
Affiliated Computer Services, Inc. and Mark A. King (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed November
27, 2006 and incorporated herein by reference).10.9
    
    Separation Agreement dated as of November 26, 2006 between
Affiliated Computer Services, Inc. and Warren D. Edwards (filed
as Exhibit 10.2 to our Current Report on Form 8-K, filed
November 27, 2006 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.
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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Name32.1*
    
    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
Item 601(b)(32)(ii) of Regulation S-K, this Exhibit is furnished
to the SEC and shall not be deemed to be filed.32.2*
    
    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,
Item 601(b)(32)(ii) of Regulation S-K this Exhibit is furnished
to the SEC and shall not be deemed to be filed.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement. 70