##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

(Mark One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

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 0-24787

AFFILIATED COMPUTER SERVICES, INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)

Registrants telephone number, including area code (214) 841-6111

Not Applicable




(Former name, former address and former fiscal year, if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o

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

Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date.

|                                     |  |                                    |             | 
|------------------------------------ |  | ---------------------------------- | ----------- | 
|                                     |  | Number of shares outstanding as of
|Title of each class                  |  | May 9, 2003                       
|                                     |  |                                   
|Class A Common Stock, $.01 par value |  |                                    | 126,257,589 | 
|Class B Common Stock, $.01 par value |  |                                    | 6,599,372   | 
|                                     |  |                                    |             | 
|                                     |  |                                    | 132,856,961 | 





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                                                 | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                                 |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME         
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                 |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                 | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                 | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II                                         
|                                                 | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                 | ITEM 5. OTHER INFORMATION                                                                    
|                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                      
|INDEX TO EXHIBITS                               
|EX-99.1 Certification of Chief Executive Officer
|EX-99.2 Certification of Chief Financial Officer



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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

INDEX

|         |  |                                                                                       |  |  |                                                                                                      |  |        |        | 
|-------- |  | ------------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------------------------------- |  | ------ | ------ | 
|         |  |                                                                                       |  |  |                                                                                                      |  | PAGE  
|         |  |                                                                                       |  |  |                                                                                                      |  | NUMBER
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |  |                                                                                                      | 
|Item 1.  |  | Consolidated Financial Statements:                                                    |  |  |                                                                                                      | 
|         |  |                                                                                       |  |  | Consolidated Balance Sheets at March 31, 2003 and June 30, 2002                                      |  |        | 1      | 
|         |  |                                                                                       |  |  | Consolidated Statements of Income for the Three Months and Nine
Months Ended March 31, 2003 and 2002 |  |        | 2      | 
|         |  |                                                                                       |  |  | Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2003 and 2002              |  |        | 3      | 
|         |  |                                                                                       |  |  | Notes to Consolidated Financial Statements                                                           |  |        | 4 - 11 | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |  | 12 - 23                                                                                              | 
|Item 4.  |  | Controls and Procedures                                                               |  |  | 23                                                                                                   | 
|PART II. |  | OTHER INFORMATION                                                                     |  |  |                                                                                                      | 
|Item 1.  |  | Legal Proceedings                                                                     |  |  | 24                                                                                                   | 
|Item 5.  |  | Other Information                                                                     |  |  | 24                                                                                                   | 
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  |  | 25                                                                                                   | 





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##### Table of Contents









ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                      |                                     |                            |                                            |                                      |           |             |           |           |           |           |  | 
|------------------------------------- | ----------------------------------- | -------------------------- | ------------------------------------------ | ------------------------------------ | --------- | ----------- | --------- | --------- | --------- | --------- |  | 
|                                      |                                     |                            |                                            |                                      |           | March 31,   |           | June 30, 
|                                      |                                     |                            |                                            |                                      |           | 2003        |           | 2002     
|                                      |                                     |                            |                                            |                                      |           | (Unaudited) |           | (Audited)
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            |                                            | ASSETS                               |           |             |           |           |           |           |  | 
|Current assets:                       |                                     |                            |                                            |                                      |           |             |           |          
|                                      | Cash and cash equivalents           |                            | $                                          | 35,404                               |           |             | $         | 33,814    |          
|                                      | Accounts receivable, net            |                            |                                            | 821,485                              |           |             |           | 736,471   |          
|                                      | Inventory                           |                            |                                            | 8,121                                |           |             |           | 9,740     |          
|                                      | Other current assets                |                            |                                            | 94,074                               |           |             |           | 94,464    |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            | Total current assets                       |                                      |           | 959,084     |           |           |           | 874,489   | 
|                                     
|Property, equipment and software, net |                                     |                            | 462,841                                    |                                      |           |             | 394,830   |          
|Goodwill, net                         |                                     |                            | 1,890,145                                  |                                      |           |             | 1,846,482 |          
|Intangibles, net                      |                                     |                            | 266,657                                    |                                      |           |             | 234,287   |          
|Other long-term assets                |                                     |                            | 55,442                                     |                                      |           |             | 53,479    |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            | Total assets                               |                                      | $         | 3,634,169   |           |           | $         | 3,403,567 | 
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |             |           |           |           |           |  | 
|Current liabilities:                  |                                     |                            |                                            |                                      |           |             |           |          
|                                      | Accounts payable                    |                            | $                                          | 55,724                               |           |             | $         | 72,858    |          
|                                      | Accrued compensation and benefits   |                            |                                            | 106,249                              |           |             |           | 125,290   |          
|                                      | Other accrued liabilities           |                            |                                            | 283,514                              |           |             |           | 210,003   |          
|                                      | Income taxes payable                |                            |                                            | 11,311                               |           |             |           | 20,452    |          
|                                      | Deferred taxes                      |                            |                                            | 30,893                               |           |             |           | 7,344     |          
|                                      | Current portion of long-term debt   |                            |                                            | 1,991                                |           |             |           | 1,330     |          
|                                      | Current portion of unearned revenue |                            |                                            | 48,856                               |           |             |           | 48,636    |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            | Total current liabilities                  |                                      |           | 538,538     |           |           |           | 485,913   | 
|                                     
|Convertible notes                     |                                     |                            | 316,990                                    |                                      |           |             | 316,990   |          
|Long-term debt                        |                                     |                            | 259,191                                    |                                      |           |             | 391,243   |          
|Deferred taxes                        |                                     |                            | 154,572                                    |                                      |           |             | 95,394    |          
|Other long-term liabilities           |                                     |                            | 34,485                                     |                                      |           |             | 18,607    |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            | Total liabilities                          |                                      |           | 1,303,776   |           |           |           | 1,308,147 | 
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|Stockholders equity:                 |                                     |                            |                                            |                                      |           |             |           |          
|                                      | Class A common stock                |                            |                                            | 1,261                                |           |             |           | 1,254     |          
|                                      | Class B common stock                |                            |                                            | 66                                   |           |             |           | 66        |          
|                                      | Additional paid-in capital          |                            |                                            | 1,344,493                            |           |             |           | 1,330,533 |          
|                                      | Retained earnings                   |                            |                                            | 984,573                              |           |             |           | 763,567   |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     | Total stockholders equity |                                            |                                      | 2,330,393 |             |           |           | 2,095,420 |          
|                                      |                                     |                            |                                            |                                      |           |             |           |          
|                                      |                                     |                            | Total liabilities and stockholders equity |                                      | $         | 3,634,169   |           |           | $         | 3,403,567 | 
|                                      |                                     |                            |                                            |                                      |           |             |           |          

The accompanying notes are an integral part of these consolidated financial statements.

1



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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)

|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |         |         |           | 
|--------------------------------------------------- | ----------------------------- | ------- | ------------------------ | ------- | ------------------ | ------- | ----------------- | ------- | ------- | ------- | --------- | --------- | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                    |                               |         |                          |         | Three Months Ended |         | Nine Months Ended
|                                                    |                               |         |                          |         | March 31,          |         | March 31,        
|                                                    |                               |         |                          |         |                    |         |                  
|                                                    |                               |         |                          |         | 2003               |         | 2002              |         | 2003    |         | 2002     
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |          
|Revenues                                            |                               | $       | 1,005,708                |         |                    | $       | 800,687           |         |         | $       | 2,832,748 |           |         | $         | 2,206,133 |        
|Expenses:                                           |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    | Wages and benefits            |         |                          | 437,677 |                    |         |                   | 351,890 |         |         |           | 1,244,456 |         |           |           | 976,180 |        
|                                                    | Services and supplies         |         |                          | 290,826 |                    |         |                   | 240,696 |         |         |           | 797,157   |         |           |           | 638,274 |        
|                                                    | Rent, lease and maintenance   |         |                          | 90,135  |                    |         |                   | 67,815  |         |         |           | 261,414   |         |           |           | 206,675 |        
|                                                    | Depreciation and amortization |         |                          | 37,899  |                    |         |                   | 26,890  |         |         |           | 109,758   |         |           |           | 78,804  |        
|                                                    | Other operating expenses      |         |                          | 14,082  |                    |         |                   | 8,055   |         |         |           | 40,253    |         |           |           | 21,896  |        
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    |                               |         | Total operating expenses |         |                    | 870,619 |                   |         |         | 695,346 |           |           |         | 2,453,038 |           |         |         | 1,921,829 | 
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                   
|                                                    | Operating income              |         |                          | 135,089 |                    |         |                   | 105,341 |         |         |           | 379,710   |         |           |           | 284,304 |        
|                                                   
|Interest expense                                    |                               |         | 6,051                    |         |                    |         | 5,789             |         |         |         | 19,252    |           |         |           | 25,971    |        
|Other non-operating expense, net                    |                               |         | 1,844                    |         |                    |         | 7,199             |         |         |         | 3,733     |           |         |           | 6,825     |        
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                   
|                                                    | Pretax profit                 |         |                          | 127,194 |                    |         |                   | 92,353  |         |         |           | 356,725   |         |           |           | 251,508 |        
|                                                   
|Income tax expense                                  |                               |         | 47,701                   |         |                    |         | 30,323            |         |         |         | 133,775   |           |         |           | 90,005    |        
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    | Net income                    |         | $                        | 79,493  |                    |         | $                 | 62,030  |         |         | $         | 222,950   |         |           | $         | 161,503 |        
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|Earnings per common share:                          |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    |                               | Basic   |                          | $       | 0.60               |         |                   | $       | 0.51    |         |           | $         | 1.69    |           |           | $       | 1.41    |          
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    |                               | Diluted |                          | $       | 0.57               |         |                   | $       | 0.46    |         |           | $         | 1.60    |           |           | $       | 1.27    |          
|                                                    |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|Shares used in computing earnings
per common share: |                               |         |                          |         |                    |         |                   |         |         |         |           |           |         |           |           |        
|                                                    |                               | Basic   |                          |         | 132,540            |         |                   |         | 122,795 |         |           |           | 132,261 |           |           |         | 114,253 |          
|                                                    |                               | Diluted |                          |         | 143,657            |         |                   |         | 142,776 |         |           |           | 143,301 |           |           |         | 135,553 |          

The accompanying notes are an integral part of these consolidated financial statements.

2



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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |          |            |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------- | -------- | ----------------- | ------- | -------- | -------- | ---------- | ------- | -
|                                                     |                                                                                   |                                                                      |                                                    |          | Nine Months Ended
|                                                     |                                                                                   |                                                                      |                                                    |          | March 31,        
|                                                     |                                                                                   |                                                                      |                                                    |          |                  
|                                                     |                                                                                   |                                                                      |                                                    |          | 2003              |         | 2002    
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |         
|Cash flows from operating activities:                |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     | Net income                                                                        |                                                                      | $                                                  | 222,950  |                   |         | $        | 161,503  |           
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                                      |                                                    |          |                   |         |          |          |           
|                                                     |                                                                                   | Depreciation and amortization                                        |                                                    |          | 109,758           |         |          |          | 78,804     |        
|                                                     |                                                                                   | Impairment of long-term investments                                  |                                                    |          | 2,400             |         |          |          | 8,449      |        
|                                                     |                                                                                   | Other non-cash activities                                            |                                                    |          | 11,747            |         |          |          | 2,839      |        
|                                                     |                                                                                   | Changes in assets and liabilities, net of effects from acquisitions: |                                                    |          |                   |         |          |          |            |        
|                                                     |                                                                                   |                                                                      | Increase in accounts receivable                    |          |                   | (89,201 | )        |          |            | (79,471 | )
|                                                     |                                                                                   |                                                                      | (Increase) decrease in inventory                   |          |                   | 868     |          |          |            | (2,565  | )
|                                                     |                                                                                   |                                                                      | Increase in other current assets                   |          |                   | (4,584  | )        |          |            | (4,565  | )
|                                                     |                                                                                   |                                                                      | Change in deferred taxes                           |          |                   | 83,778  |          |          |            | 38,468  |  
|                                                     |                                                                                   |                                                                      | Increase in other long-term assets                 |          |                   | (207    | )        |          |            | (2,777  | )
|                                                     |                                                                                   |                                                                      | Increase (decrease) in accounts payable            |          |                   | (17,975 | )        |          |            | 7,823   |  
|                                                     |                                                                                   |                                                                      | Decrease in accrued compensation and benefits      |          |                   | (24,664 | )        |          |            | (18,405 | )
|                                                     |                                                                                   |                                                                      | Increase in other accrued liabilities              |          |                   | 66,982  |          |          |            | 12,520  |  
|                                                     |                                                                                   |                                                                      | Change in income taxes payable                     |          |                   | (1,878  | )        |          |            | 19,466  |  
|                                                     |                                                                                   |                                                                      | Increase (decrease) in unearned revenue            |          |                   | 7,394   |          |          |            | (2,958  | )
|                                                     |                                                                                   |                                                                      | Increase (decrease) in other long-term liabilities |          |                   | 2,934   |          |          |            | (1,022  | )
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     |                                                                                   | Total adjustments                                                    |                                                    |          | 147,352           |         |          |          | 56,606     |        
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     |                                                                                   | Net cash provided by operating activities                            |                                                    |          | 370,302           |         |          |          | 218,109    |        
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|Cash flows from investing activities:                |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     | Purchases of property, equipment and software, net                                |                                                                      |                                                    | (153,543 | )                 |         |          | (100,607 | )         
|                                                     | Payments for acquisitions, net of cash acquired                                   |                                                                      |                                                    | (53,002  | )                 |         |          | (911,755 | )         
|                                                     | Proceeds from divestitures, net of transaction costs                              |                                                                      |                                                    | 4,974    |                   |         |          | (4,013   | )         
|                                                     | Additions to other intangible assets                                              |                                                                      |                                                    | (35,744  | )                 |         |          | (10,945  | )         
|                                                     | Proceeds from (purchase of) investments                                           |                                                                      |                                                    | 426      |                   |         |          | (4,129   | )         
|                                                     | Additions to notes receivable                                                     |                                                                      |                                                    | (3,157   | )                 |         |          | (3,014   | )         
|                                                     | Proceeds received on notes receivable                                             |                                                                      |                                                    | 8,267    |                   |         |          | 3,158    |           
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     |                                                                                   | Net cash used in investing activities                                |                                                    |          | (231,779          | )       |          |          | (1,031,305 | )      
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|Cash flows from financing activities:                |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     | Proceeds from issuance of debt                                                    |                                                                      |                                                    | 690,362  |                   |         |          | 810,360  |           
|                                                     | Repayments of debt                                                                |                                                                      |                                                    | (831,063 | )                 |         |          | (921,315 | )         
|                                                     | Proceeds from equity offering, net of transaction costs                           |                                                                      |                                                    |         |                   |         |          | 714,292  |           
|                                                     | Proceeds from stock options exercised                                             |                                                                      |                                                    | 6,365    |                   |         |          | 13,402   |           
|                                                     | Other                                                                             |                                                                      |                                                    | (2,597   | )                 |         |          | (800     | )         
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|                                                     |                                                                                   | Net cash provided by (used in) financing activities                  |                                                    |          | (136,933          | )       |          |          | 615,939    |        
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|Net increase (decrease) in cash and cash equivalents |                                                                                   |                                                                      | 1,590                                              |          |                   |         | (197,257 | )       
|Cash and cash equivalents at beginning of period     |                                                                                   |                                                                      | 33,814                                             |          |                   |         | 242,458  |         
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         
|Cash and cash equivalents at end of period           |                                                                                   | $                                                                    | 35,404                                             |          |                   | $       | 45,201   |         
|                                                     |                                                                                   |                                                                      |                                                    |          |                   |         |          |         

The accompanying notes are an integral part of these consolidated financial statements.

3



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##### Table of Contents






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



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The consolidated financial statements include the accounts of Affiliated
Computer Services, Inc. (ACS) and its majority-owned subsidiaries. All
material intercompany profits, transactions and balances have been
eliminated. We are a Fortune 500 company comprised of approximately 40,000
full-time equivalent employees providing business process and technology
outsourcing solutions to commercial, state and local government and federal
government clients in nearly 100 countries.                                                                                                                                                                                                                                                          
|  
|   |  | The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 2002. The
foregoing unaudited consolidated financial statements reflect all adjustments
(all of which are of a normal recurring nature), which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
periods. The results for the interim periods are not necessarily indicative
of results to be expected for the year.                                                                                                                                                                                                                                            
|  
|   |  | Significant accounting policies are detailed in our Annual Report on Form
10-K for the year ended June 30, 2002. For discussion of our critical
accounting policies, please refer to Managements Discussion and Analysis of
Financial Condition and Results of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|2. |  | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148). SFAS 148
provides alternative methods of transition for a voluntarily change to the
fair value method of accounting for stock-based employee compensation. SFAS
148 also amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. We adopted the disclosure requirements of
SFAS 148 effective for the quarter ended March 31, 2003.
|  
|   |  | We follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) in accounting for our stock-based
compensation plans. Under APB 25, no compensation expense is recognized for
our stock-based compensation plans since the exercise prices of awards under
our plans are at current market prices of our stock on the date of grant. Had
compensation cost for our stock-based compensation plans been determined
based on the fair value at the grant date under those plans consistent with
the fair value method of SFAS 123, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below:                                                                     

|                           |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |         | 
|-------------------------- | ---------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                           |                                                                                          |  | Three Months Ended |        | Nine Months Ended
|                           |                                                                                          |  | March 31,          |        | March 31,        
|                           |                                                                                          |  |                    |        |                  
|                           |                                                                                          |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                           |                                                                                          |  |                    |        |                   |  |      |        |     
|Net Income                 |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |        
|                           | As reported                                                                              |  | $                  | 79,493 |                   |  | $    | 62,030 |      |  | $ | 222,950 |  |  | $ | 161,503 | 
|                           | Less: Pro forma
employee compensation
cost of stock-based
compensation plans,
net of tax |  |                    | 4,427  |                   |  |      | 3,183  |      |  |   | 12,680  |  |  |   | 8,578   | 
|                           |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |        
|                           | Pro forma                                                                                |  | $                  | 75,066 |                   |  | $    | 58,847 |      |  | $ | 210,270 |  |  | $ | 152,925 | 
|                           |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |        
|Basic earnings per share   |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |        
|                           | As reported                                                                              |  | $                  | 0.60   |                   |  | $    | 0.51   |      |  | $ | 1.69    |  |  | $ | 1.41    | 
|                           | Pro forma                                                                                |  | $                  | 0.57   |                   |  | $    | 0.48   |      |  | $ | 1.59    |  |  | $ | 1.34    | 
|Diluted earnings per share |                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |        
|                           | As reported                                                                              |  | $                  | 0.57   |                   |  | $    | 0.46   |      |  | $ | 1.60    |  |  | $ | 1.27    | 
|                           | Pro forma                                                                                |  | $                  | 0.54   |                   |  | $    | 0.44   |      |  | $ | 1.52    |  |  | $ | 1.22    | 

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



|3. |  | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In September 2002, we entered into a new $875 million senior unsecured
revolving credit facility with a term of 39 months. This new facility
replaced our $450 million credit facility and the $375 million interim credit
facility, which was used to fund the acquisition of AFSA Data Corporation
(AFSA) in June 2002. The new revolving credit agreement provides for
unsecured borrowings at floating rates and fees based upon LIBOR and ACS
credit ratings. As a result, rates will fluctuate with both changes in the
overall interest rate environment as well as changes in ACS credit ratings.
Currently, borrowings bear interest at LIBOR plus 0.575%, a facility fee of
0.175% per annum on the committed amount of the facility and a usage fee of
0.125% per annum on the total amount of outstanding borrowings. After March
2003, the usage fee will be applicable only when borrowings exceed $437.5
million. The agreement matures in December 2005 and contains certain
financial covenants. As of March 31, 2003, we were in compliance with the
covenants of our credit facility.
|  
|   |  | As of March 31, 2003, we had approximately $455 million available for use
under the new facility, after giving effect to outstanding debt of
$255 million and outstanding letters of credit
of $165 million that secure certain contractual performance and other
obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|4. |  | GOODWILL AND OTHER INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The changes in the carrying amount of goodwill for the nine months ended
March 31, 2003 are as follow (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                    |  |            |           |            |  |            |         |         |  |   |         |  |  |   |           | 
|----------------------------------- |  | ---------- | --------- | ---------- |  | ---------- | ------- | ------- |  | - | ------- |  |  | - | --------- | 
|                                    |  | State and  |           |            |  |            |         |         |  |   |         |  |  |  
|                                    |  | Local      |           |            |  |            |         | Federal |  |   |         | 
|                                    |  | Government |           | Commercial |  | Government |         | Total  
|                                    |  |            |           |            |  |            |         |        
|Balance as of June 30, 2002         |  | $          | 1,055,514 |            |  | $          | 654,744 |         |  | $ | 136,224 |  |  | $ | 1,846,482 | 
|Goodwill activity during the period |  |            | 384       |            |  |            | 43,196  |         |  |   | 83      |  |  |   | 43,663    | 
|                                    |  |            |           |            |  |            |         |         |  |   |         |  |  |   |           | 
|Balance as of March 31, 2003        |  | $          | 1,055,898 |            |  | $          | 697,940 |         |  | $ | 136,307 |  |  | $ | 1,890,145 | 
|                                    |  |            |           |            |  |            |         |         |  |   |         |  |  |   |           | 



| |  | Goodwill activity for the nine months ended March 31, 2003 primarily reflects
the acquisition of CyberRep, Inc. in our commercial segment (see Note 9 for
further discussion of the CyberRep acquisition), and the payment of
contingent consideration due to former shareholders of prior year
acquisitions.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following information relates to our intangibles (in
thousands):                                                                                                                                                                                                                                         

|                              |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |         |         |  
|----------------------------- | ------------------------------------- | ----- | - | -------------- | ------- | ------------- | - | -------------- | ------- | ------------ | - | ------- | ------- |  | - | ------- | ------- | -
|                              |                                       |       |   | March 31, 2003 |         | June 30, 2002
|                              |                                       |       |   |                |         |              
|                              |                                       |       |   | Gross Carrying |         | Accumulated   |   | Gross Carrying |         | Accumulated 
|                              |                                       |       |   | Amount         |         | Amortization  |   | Amount         |         | Amortization
|                              |                                       |       |   |                |         |               |   |                |         |             
|Amortized intangible assets:  |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |        
|                              | Acquired customer-related intangibles |       | $ | 152,361        |         |               | $ | (27,541        | )       |              | $ | 143,769 |         |  | $ | (14,567 | )      
|                              | Customer-related intangibles          |       |   | 133,640        |         |               |   | (44,470        | )       |              |   | 91,232  |         |  |   | (38,953 | )      
|                              | All other                             |       |   | 4,011          |         |               |   | (2,144         | )       |              |   | 3,808   |         |  |   | (1,802  | )      
|                              |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |         |         |  
|                              |                                       | Total |   | $              | 290,012 |               |   | $              | (74,155 | )            |   | $       | 238,809 |  |   | $       | (55,322 | )
|                              |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |        
|Unamortized intangible asset: |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |        
|                              | Title plant                           |       | $ | 50,800         |         |               |   |                |         |              | $ | 50,800  |         |  |   |         |        
|                              |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |        
|                              |                                       | Total |   | $              | 50,800  |               |   |                |         |              |   | $       | 50,800  |  |   |         |         |  
|                              |                                       |       |   |                |         |               |   |                |         |              |   |         |         |  |   |        

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

|                        |                                          |  |   |        | 
|----------------------- | ---------------------------------------- |  | - | ------ | 
|Aggregate amortization: |                                          |  |   |       
|                        | For the quarter ended March 31, 2003     |  | $ | 9,246  | 
|                        | For the nine months ended March 31, 2003 |  | $ | 26,313 | 
|Estimated amortization: |                                          |  |   |       
|                        | For the year ended June 30, 2003         |  | $ | 35,347 | 
|                        | For the year ended June 30, 2004         |  | $ | 35,008 | 
|                        | For the year ended June 30, 2005         |  | $ | 31,858 | 
|                        | For the year ended June 30, 2006         |  | $ | 26,585 | 
|                        | For the year ended June 30, 2007         |  | $ | 22,955 | 



|   |  | Amortization includes amounts charged to amortization expense for
customer-related intangibles and other intangibles, other than contract
inducements. Amortization of contract inducements of $2.2 million and $5.0
million for the three and nine months ended March 31, 2003, respectively, is
recorded as a reduction of related contract revenue. Amortization expense
for the three and nine months ended March 31, 2003 includes approximately
$4.2 million and $12.0 million, respectively, for acquired customer-related
intangibles. Amortized intangible assets are amortized over the related
contract term. The amortization period of customer- related intangible
assets equates to a weighted average of approximately 8 years. The
amortization period for all other intangible assets equates to a weighted
average of 9 years.                                                                                                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | DERIVATIVES AND COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | We had no derivative financial instruments as of March 31, 2003. However,
during fiscal year 2002, we held certain derivative instruments in order to
manage certain risks. We held two interest rate hedges, designated as cash
flow hedges, which were initiated in December 1998. Both interest rate
hedges expired in December 2001. Each hedge was structured such that we paid
a fixed rate of interest of 4.54% on our $450 million revolving credit
facility, and received a floating rate of interest based on one month LIBOR.
We entered into a no-cost collar agreement in June 2001 to manage the risks
related to a marketable security investment. The collar, a fair value hedge,
was structured so that all fluctuations in the price of the marketable
security above or below 100% or 102.5% of its value on the date the collar
was entered into were hedged. The collar was settled and the investment sold
in June 2002. The change in the fair value of these derivatives for the nine
months ended March 31, 2002 was $164,000 (net of $158,000 tax effect),
increasing comprehensive income for the nine months ended March 31, 2002 to
$161.7 million.

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



|6. |  | EARNINGS PER SHARE                                                                                                                                                                                                          
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In accordance with Statement of Financial Accounting Standard No. 128,
Earnings per Share, the following table (in thousands except per share
amounts) sets forth the computation of basic and diluted earnings per share:

|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |         |        |        | 
|------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------- | ------- | ------------------ | ------ | ----------------- | ------- | ----- | ------ | ---- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | 
|                                            |                                                                                    |                                               |                               |         | Three Months Ended |        | Nine Months Ended
|                                            |                                                                                    |                                               |                               |         | March 31,          |        | March 31,        
|                                            |                                                                                    |                                               |                               |         |                    |        |                  
|                                            |                                                                                    |                                               |                               |         | 2003               |        | 2002              |         | 2003  |        | 2002
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |     
|Numerator:                                  |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|                                            | Numerator for basic earnings per share - income available to common stockholders   |                                               | $                             | 79,493  |                    |        | $                 | 62,030  |       |        | $    | 222,950 |       |        | $    | 161,503 |       
|                                            |                                                                                    | Effect of dilutive securities:                |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |         |        |       
|                                            |                                                                                    | Interest on 4% convertible debt, net of tax   |                               |         |                   |        |                   |         | 1,283 |        |      |         |      |        |      |         | 4,369  |       
|                                            |                                                                                    | Interest on 3.5% convertible debt, net of tax |                               |         | 2,054              |        |                   |         | 2,070 |        |      |         | 6,163 |        |      |         | 6,187  |       
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|                                            | Numerator for diluted earnings per share -
income available to common stockholders |                                               | $                             | 81,547  |                    |        | $                 | 65,383  |       |        | $    | 229,113 |       |        | $    | 172,059 |       
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|Denominator:                                |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|                                            | Weighted average basic shares outstanding                                          |                                               |                               | 132,540 |                    |        |                   | 122,795 |       |        |      | 132,261 |       |        |      | 114,253 |       
|                                            | Effect of dilutive securities:                                                     |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |         |       
|                                            |                                                                                    | 4% convertible debt                           |                               |         |                   |        |                   |         | 8,588 |        |      |         |      |        |      |         | 10,061 |       
|                                            |                                                                                    | 3.5% convertible debt                         |                               |         | 7,298              |        |                   |         | 7,298 |        |      |         | 7,298 |        |      |         | 7,298  |       
|                                            |                                                                                    | Stock options                                 |                               |         | 3,819              |        |                   |         | 4,095 |        |      |         | 3,742 |        |      |         | 3,941  |       
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|                                            |                                                                                    |                                               | Total potential common shares |         |                    | 11,117 |                   |         |       | 19,981 |      |         |       | 11,040 |      |         |        | 21,300 | 
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|                                            | Denominator for weighted average diluted shares                                    |                                               |                               | 143,657 |                    |        |                   | 142,776 |       |        |      | 143,301 |       |        |      | 135,553 |       
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|Earnings per common share (basic)           |                                                                                    | $                                             | 0.60                          |         |                    | $      | 0.51              |         |       | $      | 1.69 |         |       | $      | 1.41 |        
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        
|Earnings per common share assuming dilution |                                                                                    | $                                             | 0.57                          |         |                    | $      | 0.46              |         |       | $      | 1.60 |         |       | $      | 1.27 |        
|                                            |                                                                                    |                                               |                               |         |                    |        |                   |         |       |        |      |         |       |        |      |        

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



|7. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Based on the criteria set forth in Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information, we have three reportable segments: state and local government,
commercial and federal government. Certain reclassifications have been made
to prior year segment disclosure as the result of changes to our reporting
structure. The following is a summary of certain financial information by
reportable segment (in thousands):

|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|------------------------------------- |  | --------------- | --------- | ---------- |  | ---------- | ------- | --------- |  | ------------ | ------- | --- |  | - | ------- | - |  | - | --------- | 
|                                      |  | State and Local |           |            |  |            |         | Federal   |  |              |         |     |  |   |         |  
|                                      |  | Government      |           | Commercial |  | Government |         | Corporate |  | Consolidated
|                                      |  |                 |           |            |  |            |         |           |  |             
|Three
Months Ended March 31, 2003     |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Revenues                              |  | $               | 460,593   |            |  | $          | 330,886 |           |  | $            | 214,229 |     |  | $ |        |   |  | $ | 1,005,708 | 
|Operating expenses                    |  |                 | 370,000   |            |  |            | 262,323 |           |  |              | 192,207 |     |  |   | 8,190   |   |  |   | 832,720   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|EBITDA (a)                            |  |                 | 90,593    |            |  |            | 68,563  |           |  |              | 22,022  |     |  |   | (8,190  | ) |  |   | 172,988   | 
|Depreciation and amortization expense |  |                 | 11,902    |            |  |            | 19,789  |           |  |              | 5,510   |     |  |   | 698     |   |  |   | 37,899    | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Operating income                      |  | $               | 78,691    |            |  | $          | 48,774  |           |  | $            | 16,512  |     |  | $ | (8,888  | ) |  | $ | 135,089   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Three Months Ended March 31, 2002     |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Revenues                              |  | $               | 350,309   |            |  | $          | 240,726 | (b)       |  | $            | 209,652 | (c) |  | $ |        |   |  | $ | 800,687   | 
|Operating expenses                    |  |                 | 273,634   |            |  |            | 196,903 |           |  |              | 189,838 |     |  |   | 8,081   |   |  |   | 668,456   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|EBITDA (a)                            |  |                 | 76,675    |            |  |            | 43,823  |           |  |              | 19,814  |     |  |   | (8,081  | ) |  |   | 132,231   | 
|Depreciation and amortization expense |  |                 | 8,984     |            |  |            | 13,199  |           |  |              | 4,212   |     |  |   | 495     |   |  |   | 26,890    | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Operating income                      |  | $               | 67,691    |            |  | $          | 30,624  |           |  | $            | 15,602  |     |  | $ | (8,576  | ) |  | $ | 105,341   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Nine Months Ended March 31, 2003      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Revenues                              |  | $               | 1,290,019 |            |  | $          | 910,161 |           |  | $            | 632,568 |     |  | $ |        |   |  | $ | 2,832,748 | 
|Operating expenses                    |  |                 | 1,041,181 |            |  |            | 704,420 |           |  |              | 567,533 |     |  |   | 30,146  |   |  |   | 2,343,280 | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|EBITDA (a)                            |  |                 | 248,838   |            |  |            | 205,741 |           |  |              | 65,035  |     |  |   | (30,146 | ) |  |   | 489,468   | 
|Depreciation and amortization expense |  |                 | 35,124    |            |  |            | 56,519  |           |  |              | 15,995  |     |  |   | 2,120   |   |  |   | 109,758   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Operating income                      |  | $               | 213,714   |            |  | $          | 149,222 |           |  | $            | 49,040  |     |  | $ | (32,266 | ) |  | $ | 379,710   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Nine Months Ended March 31, 2002      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Revenues                              |  | $               | 920,100   |            |  | $          | 695,064 | (b)       |  | $            | 590,969 | (c) |  | $ |        |   |  | $ | 2,206,133 | 
|Operating expenses                    |  |                 | 720,355   |            |  |            | 569,984 |           |  |              | 532,035 |     |  |   | 20,651  |   |  |   | 1,843,025 | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|EBITDA (a)                            |  |                 | 199,745   |            |  |            | 125,080 |           |  |              | 58,934  |     |  |   | (20,651 | ) |  |   | 363,108   | 
|Depreciation and amortization expense |  |                 | 24,188    |            |  |            | 40,437  |           |  |              | 12,671  |     |  |   | 1,508   |   |  |   | 78,804    | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 
|Operating income                      |  | $               | 175,557   |            |  | $          | 84,643  |           |  | $            | 46,263  |     |  | $ | (22,159 | ) |  | $ | 284,304   | 
|                                      |  |                 |           |            |  |            |         |           |  |              |         |     |  |   |         |   |  |   |           | 



|(a) |  | Earnings before interest, taxes, depreciation and amortization
(EBITDA) is measured as operating income before deduction for
depreciation and amortization, both as reported in our consolidated
statements of income. We use EBITDA, together with operating income, as
a measure of segment and consolidated performance. We believe the
exclusion of depreciation and amortization charges provides a meaningful
measure of operating performance. While EBITDA is a widely recognized
financial measure, it is not a measure of financial performance or
liquidity under GAAP and should not be considered in isolation or as an
alternative to net income, as an indicator of our performance, or to
cash flows from operating activities as a measure of liquidity.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Commercial segment includes $6.4 million and $26.7 million for the
three months and nine months ended March 31, 2002, respectively, of
revenue related to divested units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(c) |  | Federal government segment includes $0.6 million and $4.0 million for
the three months and nine months ended March 31, 2002, respectively, of
revenue related to divested units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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



| |  | The following reconciles consolidated operating income to consolidated
pretax profit (in thousands):
| |  | ----------------------------------------------------------------------------------------------------

|                           |                                  |   |                    |         |                   |   |        |         |      |   |         |         |  |   |         |         | 
|-------------------------- | -------------------------------- | - | ------------------ | ------- | ----------------- | - | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                           |                                  |   | Three Months Ended |         | Nine Months Ended
|                           |                                  |   | March 31,          |         | March 31,        
|                           |                                  |   |                    |         |                  
|                           |                                  |   | 2003               |         | 2002              |   | 2003   |         | 2002
|                           |                                  |   |                    |         |                   |   |        |         |     
|                           | Consolidated operating income    |   | $                  | 135,089 |                   |   | $      | 105,341 |      |   | $       | 379,710 |  |   | $       | 284,304 | 
|                           | Interest expense                 |   |                    | 6,051   |                   |   |        | 5,789   |      |   |         | 19,252  |  |   |         | 25,971  | 
|                           | Other non-operating expense, net |   |                    | 1,844   |                   |   |        | 7,199   |      |   |         | 3,733   |  |   |         | 6,825   | 
|                           |                                  |   |                    |         |                   |   |        |         |      |   |         |         |  |   |         |        
|Consolidated pretax profit |                                  | $ | 127,194            |         |                   | $ | 92,353 |         |      | $ | 356,725 |         |  | $ | 251,508 |        
|                           |                                  |   |                    |         |                   |   |        |         |      |   |         |         |  |   |         |        



|8. |  | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As of June 30, 2002, we held a minority preferred stock interest in DDH
Aviation, Inc., a corporate airplane brokerage company organized in 1997
(DDH). Our Chairman owns a majority voting interest in DDH and our
President and General Counsel, along with our Chairman were directors of DDH.
At June 30, 2002, DDH had a $48 million line of credit with Citicorp USA,
Inc., for which we and our Chairman, in exchange for warrants to acquire
additional voting stock, acted as partial guarantors. In addition, we
obtained access to corporate aircraft at favorable rates in consideration of
our guaranty. We had guaranteed up to approximately $11.5 million of the
line of credit and our Chairman guaranteed up to approximately $17.5 million
of the line of credit.
|  
|   |  | Subsequent to June 30, 2002, our Chairman assumed in full our guaranty
obligations to Citicorp and our guaranty to Citicorp was released in full.
Our minority preferred stock interest and warrants (with a recorded value of
$100,000 at June 30, 2002) in DDH were cancelled. We have no further
contingent liability related to DDH debt and no ownership interest in DDH.
Our officers, other than the Chairman, are no longer directors of DDH. In
July 2002, we purchased $1.0 million in prepaid charter flights at favorable
rates from DDH.                                                                                                                                                                                                                                 
|  
|9. |  | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | In January 2003, we acquired CyberRep, Inc. (CyberRep). CyberRep provides
customer care and customer relationship management services for the
telecommunications, wireless communications, technology, and consumer
products industries. CyberRep reported revenues of more than $60 million for
the year ended December 31, 2002. CyberReps operating results are included
in our consolidated financial statements from the effective date of the
acquisition, January 1, 2003. This acquisition is not considered material to
our results of operations; therefore, pro forma information for this
acquisition is not included in the pro forma financial information presented
below.                                                                                          
|  
|   |  | In June 2002, we acquired AFSA, a subsidiary of FleetBoston Financial
Corporation, for approximately $410 million plus related transaction costs.
The acquisition was funded with a combination of a $375 million 18-month
interim credit facility, borrowings from our existing revolving credit
facility, and existing cash on hand. The $375 million interim credit
facility was repaid in September 2002 with the proceeds of our $875 million
39-month revolving credit facility (see Note 3). AFSAs results of operations
have been included in our consolidated financial statements from the
effective date of the acquisition, June 1, 2002.                                                                                                                                
|  
|   |  | In August 2001, we acquired 100% of the stock of Lockheed Martin IMS
Corporation (IMS), a wholly owned subsidiary of Lockheed Martin
Corporation, for approximately $825 million plus related transaction costs.
The acquisition was funded from a $550 million 18-month interim credit
facility, borrowings from our $450 million revolving credit facility, and
existing cash on hand. The $550 million 18-month interim credit facility was
repaid in October 2001 with the proceeds of our issuance of Class A common
stock. IMS results have been included in our consolidated financial
statements from the effective date of the acquisition, August 1, 2001.                                                                                                               

9



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



| |  | Pro forma Financial Information                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following unaudited pro forma information presents a summary of our
consolidated results of operations as if the IMS acquisition and the AFSA
acquisition had occurred at the beginning of the periods presented and are
not necessarily indicative of future results or actual results that would
have been achieved had the acquisition occurred at the beginning of the
periods presented.

|                           |  |                            |           |                           |  |      |         |      |  |   |           |  |  |   |           | 
|-------------------------- |  | -------------------------- | --------- | ------------------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                           |  | For the three months ended |           | For the nine months ended
|                           |  | March 31,                  |           | March 31,                
|                           |  |                            |           |                          
|                           |  | 2003                       |           | 2002                      |  | 2003 |         | 2002
|                           |  |                            |           |                           |  |      |         |     
|Revenue                    |  | $                          | 1,005,708 |                           |  | $    | 846,059 |      |  | $ | 2,832,748 |  |  | $ | 2,381,601 | 
|Net income                 |  |                            | 79,493    |                           |  |      | 65,260  |      |  |   | 222,950   |  |  |   | 183,202   | 
|Earnings per common share: |  |                            |           |                           |  |      |         |      |  |   |           |  |  |   |           | 
|Basic                      |  | $                          | .60       |                           |  | $    | .53     |      |  | $ | 1.69      |  |  | $ | 1.60      | 
|Diluted                    |  | $                          | .57       |                           |  | $    | .48     |      |  | $ | 1.60      |  |  | $ | 1.43      | 



|10. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by 21 former employees of Gibraltar
Savings Association and/or First Texas Savings Association (collectively,
GSA/FTSA). The GSA/FTSA employees alleged that they were entitled to the
value of 803,082 shares of our stock (adjusted for February 2002 stock split)
pursuant to options issued to the GSA/FTSA employees in 1988 in connection
with a former technology outsourcing services agreement between GSA/FTSA and
us. The judgment against us was for approximately $17 million, which
includes attorneys fees and pre-judgment interest, but excludes additional
attorneys fees of approximately $0.9 million and post-judgment interest at
the statutorily mandated rate of 10% per annum, which could be awarded in the
event the plaintiffs are successful upon appeal and final judgment. The
judgment was appealed by the plaintiffs and us.
|   
|    |  | On August 29, 2002, the Fourteenth Court of Appeals, Houston, Texas, reversed
the trial courts judgment and remanded the case to the trial court for
further proceedings. However, the court of appeals affirmed the trial court
judgment in part as to one of the plaintiffs. The court of appeals also held
that the trial court did not err in dismissing certain of our affirmative
defenses at a pretrial conference. We and the plaintiffs filed motions for
rehearing with the court of appeals. On January 16, 2003, the court of
appeals denied both motions for rehearing (except the court reversed its
previous ruling that the trial court should have applied prejudgment interest
at 6% rather than 10%).                                                                                                                                                                                                                                                              
|   
|    |  | On March 3, 2003 we filed a Petition for Review with the Texas Supreme Court
requesting that the Court reverse the decision of the court of appeals and
render judgment that the plaintiffs take nothing or, alternatively, remand
the case to the trial court for further proceedings. The plaintiffs did not
file a petition for review with the Texas Supreme Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | We continue to believe that we have a meritorious defense to all or a
substantial portion of the plaintiffs claims, and accordingly, have not
accrued any amount on our balance sheet related to the lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | In addition to the foregoing, we are subject to certain other legal
proceedings, claims and disputes which arise in the ordinary course of
business. Although we cannot predict the outcomes of these legal proceedings,
we do not believe these actions, in the aggregate, will have a material
adverse effect on our financial position, results of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|11. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148). See Note
2 for a discussion of the impact of SFAS 148.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others (FIN 45). FIN 45 requires that a
guarantor recognize a liability at inception of certain guarantees and
disclose certain other types of guarantees, even if the likelihood of
requiring the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

10



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



| |  | guarantors performance is remote. The initial recognition and measurement
provisions of FIN 45 are applicable to guarantees issued or modified after
December 31, 2002. The disclosure provisions of FIN 45 are effective for
financial statements that end after December 15, 2002. The adoption of FIN
45 did not have a material effect on our financial position or results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Emerging Issues Task Force Issue 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables (EITF 00-21) addresses the accounting treatment
for an arrangement to provide the delivery or performance of multiple
products and/or services
where the delivery of a product or system or performance of services may
occur at different points in time or over different periods of time. The
arrangements are often accompanied by initial installation or initiation
services and involve either a fixed fee or a fixed fee coupled with a
continuing payment stream, which may be fixed or variable. The EITF reached a
consensus regarding, among other issues, the applicability of the provisions
regarding separation of contract elements in EITF 00-21 to contracts where
one or more elements fall within the scope of other authoritative literature,
such as Statement of Position 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP 81-1). EITF
00-21 does not impact the use of SOP 81-1 for contracts that fall within the
scope of SOP 81-1, such as the implementation or development of an
information technology system to client specifications under a long-term
contract. Where an implementation or development project is contracted with a
client, and we will also provide services or operate the system over a period
of time, EITF 00-21 provides the methodology for separating the contract
elements and allocating total arrangement consideration to the contract
elements. The provisions of EITF 00-21 will be applicable on a prospective
basis to transactions entered into in fiscal years beginning after June 15,
2003. We believe that EITF 00-21 will not have a material impact on our
financial position or results of operations.
|
| |  | In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS
146), which changes the rules for how companies must account for costs
associated with exit or disposal activities. Costs typically associated with
exit or disposal activities include one-time employee termination costs,
contract cancellation provisions, and relocation costs. SFAS 146 nullifies
EITF Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). The provisions of the new standard are
effective for exit or disposal activities initiated after December 31, 2002,
with early application encouraged. We do not believe that SFAS 146 will have
a material impact on our financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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

All statements in this Managements Discussion and Analysis of Financial
Condition and Results of Operations that are not based on historical fact are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and the provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (which Sections were adopted as part of Private
Securities Litigation Reform Act of 1995). While management has based any
forward-looking statements contained herein on its current expectations, the
information on which such expectations were based may change. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of risks, uncertainties, and other factors,
many of which are outside of our control, that could cause actual results to
materially differ from such statements. Such risks, uncertainties, and other
factors include, but are not necessarily limited to, those set forth under the
caption Risks Related to our Business. In addition, we operate in a highly
and rapidly changing environment, and new risks may arise. Accordingly,
investors should not place any reliance on forward-looking statements as a
prediction of actual results. We disclaim any intention to, and undertake no
obligation to, update or revise any forward-looking statement.

We report our financial results in accordance with generally accepted
accounting principles (GAAP). However, we believe that certain non-GAAP
financial measures and ratios, used in managing our business, may provide users
of this financial information with additional meaningful comparisons between
current results and prior reported results. Certain of the information set
forth herein and certain of the information presented by us from time to time
(including free cash flow and internal revenue growth) may constitute non-GAAP
financial measures within the meaning of Regulation G and Item 10 of Regulation
S-K adopted by the Securities and Exchange Commission. We have presented
herein a reconciliation of these measures to the most directly comparable GAAP
financial measure. The presentation of this additional information in not
meant to be considered in isolation or as a substitute for comparable amounts
determined in accordance with generally accepted accounting principles in the
United States.

GENERAL

During the three months ended March 31, 2003, we signed contracts with new
clients and incremental business with existing clients representing $171
million of annualized recurring revenue. The state and local governments
segment contributed 73% of the new contract signings, including a new contract
with the Texas Health and Human Services Commission to provide fiscal agent and
administrative services. The commercial segment contributed 18% of the new
contract signings and the federal government segment contributed the remaining
9%. Fiscal year-to-date new business signings represent $556 million of
annualized recurring revenue. We define new business signings as recurring
revenue from new contracts, including the incremental portion of renewals,
signed during the period and represent the estimated annual recurring revenues,
as measured under GAAP, to be recorded under that contract after full
implementation.

In the nine months ended March 31, 2003, we acquired CyberRep, Inc.
(CyberRep), which is now a part of our commercial segment. CyberRep provides
customer care and customer relationship management services for the
telecommunications, wireless communications, technology, and consumer products
industries. CyberRep reported revenues of more than $60 million for the year
ended December 31, 2002. CyberReps operating results are included in our
consolidated financial statements from the effective date of the acquisition,
January 1, 2003.

In the nine months ended March 31, 2002, we closed two significant
transactions: the acquisition of Lockheed Martin IMS Corporation (IMS), a
wholly-owned subsidiary of Lockheed Martin Corporation, which is now a part of
our state and local government segment; and the acquisition of the business
process outsourcing services unit of National Processing Company (NPC).

IMS, with its principal offices located in Washington D.C. and approximately
4,800 employees primarily throughout the United States, provides services to
state and local government agencies in child support enforcement, welfare and
workforce services, child care management, electronic toll collection, and
other intelligent transportation services involving the trucking industry,
photo enforcement of red-light and speeding violations, parking management, and
information technology outsourcing. The transaction, valued at $825 million
plus related transaction costs, was initially funded through a combination of a
$550 million, 18-month interim credit facility, borrowings on our existing
credit facility and existing cash on hand, which was repaid in October 2001
with proceeds from our issuance of Class A common stock. IMS operating
results are included in our financial statements from the effective date of the
acquisition, August 1, 2001.

NPC provides healthcare claims processing, credit card application processing
and airline lift ticket processing. As part of the transaction, we acquired all
of NPCs offshore operations in Jamaica, the Dominican Republic, Barbados and a
majority of NPCs Mexican operations. The transaction value was $43 million
plus related transaction costs. NPCs operating results are included in our
financial statements from the effective date of the acquisition, August 1,
2001.

In addition to the IMS and NPC acquisitions that were completed in the nine
months ended March 31, 2002, we acquired six other companies in fiscal year
2002, the most significant of which are discussed below.

12



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##### Table of Contents



In May 2002, we acquired the finance and accounting business process
outsourcing unit of Andersen Worldwide (Andersen). Included in this
acquisition are contracts with General Motors (GM) and the University of
Phoenix (the University). Under a new 10-year agreement with GM, we will
provide transactional accounting services such as payroll processing,
disbursement processing, dealer accounting, accounts receivable processing,
lease and subsidiary accounting, and expense reporting in the United States and
Europe. Under the arrangement with the University, we will provide student
financial aid business process outsourcing services to the University including
federal eligibility determinations, loan and grant processing, and disbursement
of student aid as well as other support services related to student financial
aid processing. The transaction was valued at approximately $65 million plus
related transaction costs. Andersens operating results are included in our
financial statements from the effective date of the acquisition, May 1, 2002
for the domestic operations, and June 1, 2002 for the foreign operations.

In June 2002, we acquired AFSA Data Corporation (AFSA), a subsidiary of
FleetBoston Financial Corporation, for approximately $410 million plus related
transaction costs. AFSA is the nations largest educational services company,
servicing a student loan portfolio of 8.1 million borrowers with outstanding
loans of approximately $85 billion. Additionally, AFSA provides business
process outsourcing services to federal, state, and local governments for a
variety of health and human services programs, including Medicare, Medicaid,
childrens health insurance programs (CHIP), and welfare-to-workforce services.
AFSAs operating results are included in our financial statements from the
effective date of the acquisition, June 1, 2002.

Our largest contract is with the Department of Education (the Department),
for which we service student loans under the Department of Educations Direct
Student Loan program administered by its Office of Federal Student Aid (FSA).
Revenues from this contract represent approximately 4% of our consolidated
revenues. This contract was scheduled to run through September 30, 2003. In
November 2001, the Department extended the contract term through September 30,
2006, with an option for further extension through September 30, 2007. In
December 2001, SLM Corporation (Sallie Mae) challenged the Departments
sole-source extension in a protest filed with the Department. The FSA
initially took the position that the Sallie Mae protest was without merit and
that the contract extension was lawful. In July 2002, the Departments
deciding official sustained the protest, concluding that further market
research was needed to support the sole-source extension of our contract.
However, the deciding official declined to rescind our contract extension and
directed the FSA to analyze its direct loan servicing needs and procure the
services in compliance with law.

On January 31, 2003 FSA officials notified us that they would conduct a
competitive procurement for Common Services for Borrowers which will be an
integrated solution for FSA for servicing, consolidation and collections
functions for federally insured student aid obligations and will absorb all
loan servicing requirements for the Department.

On April 24, 2003 the Department invited interested parties to participate in
phase one of a competitive procurement the Department is conducting for Common
Services for Borrowers which will be an integrated solution for FSA for
servicing, consolidation and collections functions for federally insured
student aid obligations. We believe this broader proposed scope of services
represents over $50 million of revenue incremental to our annual revenue under
the current contract. The Department announced that the award will be a
fixed-price, performance-based incentive contract of up to ten years, including
option terms. The Department will conduct the procurement in two phases. In
phase one the Department has stated it will select those offerors who will be
eligible to participate in the second phase of the competition. The phase one
selection is expected to occur on or about May 19, 2003 and will be based on
four evaluation factors: the offerors conceptual approach, organizational
experience, rough order of magnitude of costs, and past performance. We
submitted our phase one proposal to the Department on May 12, 2003 in
conformance with the Common Services for Borrowers requirements. The
Department has stated that it will issue a request for proposals to the
offerors selected in phase one on May 19, 2003 and proposals are required to be
submitted by June 19, 2003. The phase two selection process is expected to be
completed by September 2003. We believe we are positioned favorably for this
competitive procurement process because of our performance record with the
Department. However, there can be no assurance that we will be awarded the new
contract for Common Services to Borrowers.

In connection with the transition from the existing ACS contract to the
implementation of Common Services to Borrowers, on May 8, 2003 the following
announcement was posted on the Departments web site: Single source
procurement for continued service and turnover. The Department of Education
has conducted extensive market research to fulfill its loan servicing needs
between December 1, 2003 and September 30, 2007. In performing this market
research, the Department has determined that the extension to the Direct Loan
Servicing System with [the] ACS contract is appropriate. The Department has
determined that a transition period of, at a minimum, 24 to 36 months will be
necessary for any contractor to build out an infrastructure and begin
processing the more than seven million borrowers in the current Direct Loan
portfolio. The Department has completed market research for the procurement of
Common Services for Borrowers, which will absorb all loan servicing
requirements for the Department. Award of this contract is expected on or
about 9/30/03. The single source extension is required to allow for a
reasonable transition period from the current direct loan servicer to the
awardee of the Common Services for Borrower[s] acquisition.

Subsequently, on May 13, 2003 the Department issued a Modification to a
Previous Presolicitation Notice for the purpose of clarifying its public
announcement of May 8, 2003. In the Modification, the Department stated that
it intended to enter into negotiations with us to modify our existing contract.
Further, the Department stated that: The purpose of the negotiations would be
to revise the period of
performance of the current contract for a period of up to 36 months, with the
use of appropriate options, through September 30, 2006. This modification will
allow the Department to accommodate a prompt and successful transition to the
Common Services For Borrowers (CSB) vendor. ... this contract action is
contemplated to be sole source based on only one responsible source and no
[not] other supplies or services will satisfy agency requirements. No formal
solicitation is available. The Department [Government] anticipates a
modification not later than 30 September 2003. Accordingly, we expect to
enter into discussions with the Department to finalize this modification before
September 30, 2003.

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##### Table of Contents



REVENUE GROWTH

Internal revenue growth is measured as total revenue growth less acquired
revenue from acquisitions. Acquired revenue from acquisitions is based on
pre-acquisition normalized revenue of acquired companies. The Company uses the
calculation of internal revenue growth to measure revenue growth excluding the
impact of acquired revenues and believes these adjustments to historical
reported results are necessary to accurately reflect the internal
revenue growth of the
Company. The following table sets forth the calculation of internal revenue
growth (in thousands):

Consolidated

|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |           |   |  |   |         |  |  |  |    |  
|------------------ |  | ---------------------- | --------- | --------------------------- |  | -------- | ------- | -------- |  | ---- | ------- | ---- |  | -------- | -- | -------- |  | - | --------- |  |  | - | --------- | - |  | - | ------- |  |  |  | -- | -
|                   |  | Quarter ended March 31 |           | Nine Months ended March 31,
|                   |  |                        |           |                            
|                   |  | 2003                   |           | 2002                        |  | $ Growth |         | Growth % |  | 2003 |         | 2002 |  | $ Growth |    | Growth %
|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |         
|Total Revenues     |  | $                      | 1,005,708 |                             |  | $        | 800,687 |          |  | $    | 205,021 |      |  |          | 26 | %        |  | $ | 2,832,748 |  |  | $ | 2,206,133 |   |  | $ | 626,615 |  |  |  | 28 | %
|Less: Divestitures |  |                        |          |                             |  |          | (7,127  | )        |  |      | 7,127   |      |  |          |    |          |  |   |          |  |  |   | (30,684   | ) |  |   | 30,684  |  |  |  |    |  
|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |           |   |  |   |         |  |  |  |    |  
|Adjusted           |  | $                      | 1,005,708 |                             |  | $        | 793,560 |          |  | $    | 212,148 |      |  |          | 27 | %        |  | $ | 2,832,748 |  |  | $ | 2,175,449 |   |  | $ | 657,299 |  |  |  | 30 | %
|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |           |   |  |   |         |  |  |  |    |  
|Acquired revenues  |  | $                      | 78,812    |                             |  | $        | 8,968   |          |  | $    | 69,844  |      |  |          | 9  | %        |  | $ | 379,355   |  |  | $ | 123,054   |   |  | $ | 256,301 |  |  |  | 12 | %
|Internal revenues  |  |                        | 926,896   |                             |  |          | 784,592 |          |  |      | 142,304 |      |  |          | 18 | %        |  |   | 2,453,393 |  |  |   | 2,052,395 |   |  |   | 400,998 |  |  |  | 18 | %
|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |           |   |  |   |         |  |  |  |    |  
|Total              |  | $                      | 1,005,708 |                             |  | $        | 793,560 |          |  | $    | 212,148 |      |  |          | 27 | %        |  | $ | 2,832,748 |  |  | $ | 2,175,449 |   |  | $ | 657,299 |  |  |  | 30 | %
|                   |  |                        |           |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |           |   |  |   |         |  |  |  |    |  

State & Local Government

|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |         |  |  |   |         |  |  |  |    |  
|------------------ |  | ----------------------- | ------- | --------------------------- |  | -------- | ------- | -------- |  | ---- | ------- | ---- |  | -------- | -- | -------- |  | - | --------- |  |  | - | ------- |  |  | - | ------- |  |  |  | -- | -
|                   |  | Quarter ended March 31, |         | Nine Months ended March 31,
|                   |  |                         |         |                            
|                   |  | 2003                    |         | 2002                        |  | $ Growth |         | Growth % |  | 2003 |         | 2002 |  | $ Growth |    | Growth %
|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |         
|Total Revenues     |  | $                       | 460,593 |                             |  | $        | 350,309 |          |  | $    | 110,284 |      |  |          | 32 | %        |  | $ | 1,290,019 |  |  | $ | 920,100 |  |  | $ | 369,919 |  |  |  | 40 | %
|Less: Divestitures |  |                         |        |                             |  |          |        |          |  |      |        |      |  |          |    |          |  |   |          |  |  |   |        |  |  |   |        |  |  |  |   |  
|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |         |  |  |   |         |  |  |  |    |  
|Adjusted           |  | $                       | 460,593 |                             |  | $        | 350,309 |          |  | $    | 110,284 |      |  |          | 32 | %        |  | $ | 1,290,019 |  |  | $ | 920,100 |  |  | $ | 369,919 |  |  |  | 40 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |         |  |  |   |         |  |  |  |    |  
|Acquired revenues  |  | $                       | 20,928  |                             |  | $        |        |          |  | $    | 20,928  |      |  |          | 6  | %        |  | $ | 217,783   |  |  | $ | 103,400 |  |  | $ | 114,383 |  |  |  | 12 | %
|Internal revenues  |  |                         | 439,665 |                             |  |          | 350,309 |          |  |      | 89,356  |      |  |          | 26 | %        |  |   | 1,072,236 |  |  |   | 816,700 |  |  |   | 255,536 |  |  |  | 28 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |         |  |  |   |         |  |  |  |    |  
|Total              |  | $                       | 460,593 |                             |  | $        | 350,309 |          |  | $    | 110,284 |      |  |          | 32 | %        |  | $ | 1,290,019 |  |  | $ | 920,100 |  |  | $ | 369,919 |  |  |  | 40 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |         |      |  |          |    |          |  |   |           |  |  |   |         |  |  |   |         |  |  |  |    |  

Commercial

|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |          |  |   |         |  |  |   |         |   |  |   |         |  |  |  |    |  
|------------------ |  | ----------------------- | ------- | --------------------------- |  | -------- | ------- | -------- |  | ---- | ------ | ---- |  | -------- | -- | -------- |  | - | ------- |  |  | - | ------- | - |  | - | ------- |  |  |  | -- | -
|                   |  | Quarter ended March 31, |         | Nine Months ended March 31,
|                   |  |                         |         |                            
|                   |  | 2003                    |         | 2002                        |  | $ Growth |         | Growth % |  | 2003 |        | 2002 |  | $ Growth |    | Growth %
|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |         
|Total Revenues     |  | $                       | 330,886 |                             |  | $        | 240,726 |          |  | $    | 90,160 |      |  |          | 37 | %        |  | $ | 910,161 |  |  | $ | 695,064 |   |  | $ | 215,097 |  |  |  | 31 | %
|Less: Divestitures |  |                         |        |                             |  |          | (6,434  | )        |  |      | 6,434  |      |  |          |    |          |  |   |        |  |  |   | (26,682 | ) |  |   | 26,682  |  |  |  |    |  
|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |          |  |   |         |  |  |   |         |   |  |   |         |  |  |  |    |  
|Adjusted           |  | $                       | 330,886 |                             |  | $        | 234,292 |          |  | $    | 96,594 |      |  |          | 41 | %        |  | $ | 910,161 |  |  | $ | 668,382 |   |  | $ | 241,779 |  |  |  | 36 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |          |  |   |         |  |  |   |         |   |  |   |         |  |  |  |    |  
|Acquired revenues  |  | $                       | 51,484  |                             |  | $        | 2,568   |          |  | $    | 48,916 |      |  |          | 21 | %        |  | $ | 142,342 |  |  | $ | 13,254  |   |  | $ | 129,088 |  |  |  | 19 | %
|Internal revenues  |  |                         | 279,402 |                             |  |          | 231,724 |          |  |      | 47,678 |      |  |          | 20 | %        |  |   | 767,819 |  |  |   | 655,128 |   |  |   | 112,691 |  |  |  | 17 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |          |  |   |         |  |  |   |         |   |  |   |         |  |  |  |    |  
|Total              |  | $                       | 330,886 |                             |  | $        | 234,292 |          |  | $    | 96,594 |      |  |          | 41 | %        |  | $ | 910,161 |  |  | $ | 668,382 |   |  | $ | 241,779 |  |  |  | 36 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |        |      |  |          |    |          |  |   |         |  |  |   |         |   |  |   |         |  |  |  |    |  

Federal Government

|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |          |  |   |         |  |  |   |         |   |  |   |        |  |  |  |   |  
|------------------ |  | ----------------------- | ------- | --------------------------- |  | -------- | ------- | -------- |  | ---- | ----- | ---- |  | -------- | - | -------- |  | - | ------- |  |  | - | ------- | - |  | - | ------ |  |  |  | - | -
|                   |  | Quarter ended March 31, |         | Nine Months ended March 31,
|                   |  |                         |         |                            
|                   |  | 2003                    |         | 2002                        |  | $ Growth |         | Growth % |  | 2003 |       | 2002 |  | $ Growth |   | Growth %
|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |         
|Total Revenues     |  | $                       | 214,229 |                             |  | $        | 209,652 |          |  | $    | 4,577 |      |  |          | 2 | %        |  | $ | 632,568 |  |  | $ | 590,969 |   |  | $ | 41,599 |  |  |  | 7 | %
|Less: Divestitures |  |                         |        |                             |  |          | (693    | )        |  |      | 693   |      |  |          |   |          |  |   |        |  |  |   | (4,002  | ) |  |   | 4,002  |  |  |  |   |  
|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |          |  |   |         |  |  |   |         |   |  |   |        |  |  |  |   |  
|Adjusted           |  | $                       | 214,229 |                             |  | $        | 208,959 |          |  | $    | 5,270 |      |  |          | 3 | %        |  | $ | 632,568 |  |  | $ | 586,967 |   |  | $ | 45,601 |  |  |  | 8 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |          |  |   |         |  |  |   |         |   |  |   |        |  |  |  |   |  
|Acquired revenues  |  | $                       | 6,400   |                             |  | $        | 6,400   |          |  | $    |      |      |  |          |  |          |  | $ | 19,200  |  |  | $ | 6,400   |   |  | $ | 12,800 |  |  |  | 2 | %
|Internal revenues  |  |                         | 207,829 |                             |  |          | 202,559 |          |  |      | 5,270 |      |  |          | 3 | %        |  |   | 613,368 |  |  |   | 580,567 |   |  |   | 32,801 |  |  |  | 6 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |          |  |   |         |  |  |   |         |   |  |   |        |  |  |  |   |  
|Total              |  | $                       | 214,229 |                             |  | $        | 208,959 |          |  | $    | 5,270 |      |  |          | 3 | %        |  | $ | 632,568 |  |  | $ | 586,967 |   |  | $ | 45,601 |  |  |  | 8 | %
|                   |  |                         |         |                             |  |          |         |          |  |      |       |      |  |          |   |          |  |   |         |  |  |   |         |   |  |   |        |  |  |  |   |  

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RESULTS OF OPERATIONS

The following table sets forth certain items from our consolidated statements
of income as a percentage of revenues:

|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |      |      | 
|-------------------------------- | ----------------------------- | ------------------------ | ----- | ------------------ | ---- | ----------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                 |                               |                          |       | Three Months Ended |      | Nine Months Ended
|                                 |                               |                          |       | March 31,          |      | March 31,        
|                                 |                               |                          |       |                    |      |                  
|                                 |                               |                          |       | 2003               |      | 2002              |       | 2003 |      | 2002
|                                 |                               |                          |       |                    |      |                   |       |      |      |     
|Revenues                         |                               |                          | 100.0 | %                  |      |                   | 100.0 | %    |      |      | 100.0 | %    |      |  | 100.0 | %   
|                                
|Expenses:                        |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                 | Wages and benefits            |                          |       | 43.5               |      |                   |       | 43.8 |      |      |       | 43.9 |      |  |       | 44.2 |     
|                                 | Services and supplies         |                          |       | 28.9               |      |                   |       | 30.1 |      |      |       | 28.2 |      |  |       | 28.9 |     
|                                 | Rent, lease and maintenance   |                          |       | 9.0                |      |                   |       | 8.5  |      |      |       | 9.2  |      |  |       | 9.4  |     
|                                 | Depreciation and amortization |                          |       | 3.8                |      |                   |       | 3.4  |      |      |       | 3.9  |      |  |       | 3.6  |     
|                                 | Other operating expenses      |                          |       | 1.4                |      |                   |       | 1.0  |      |      |       | 1.4  |      |  |       | 1.0  |     
|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                 |                               | Total operating expenses |       |                    | 86.6 |                   |       |      | 86.8 |      |       |      | 86.6 |  |       |      | 87.1 | 
|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                 | Operating income              |                          |       | 13.4               |      |                   |       | 13.2 |      |      |       | 13.4 |      |  |       | 12.9 |     
|                                
|Interest expense                 |                               |                          | 0.6   |                    |      |                   | 0.7   |      |      |      | 0.7   |      |      |  | 1.2   |     
|Other non-operating expense, net |                               |                          | 0.2   |                    |      |                   | 1.0   |      |      |      | 0.1   |      |      |  | 0.3   |     
|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                 | Pretax profit                 |                          |       | 12.6               |      |                   |       | 11.5 |      |      |       | 12.6 |      |  |       | 11.4 |     
|                                 | Income tax expense            |                          |       | 4.7                |      |                   |       | 3.8  |      |      |       | 4.7  |      |  |       | 4.1  |     
|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                 | Net income                    |                          |       | 7.9                | %    |                   |       | 7.7  | %    |      |       | 7.9  | %    |  |       | 7.3  | %   
|                                 |                               |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     

COMPARISON OF THE QUARTER ENDED MARCH 31, 2003 TO THE QUARTER ENDED MARCH 31, 2002

Revenues
In the third quarter of fiscal 2003, our revenue increased $205.0 million, or
26%, to $1.01 billion from $800.7 million in the third quarter of fiscal 2002.
Internal revenue growth for the third quarter of fiscal 2003 was 18%. The
remaining revenue growth was due to acquisitions.

Revenue in our state and local
governments segment, which represents 46% of consolidated
revenue for the third quarter of fiscal 2003, increased $110.3 million, or 32%,
to $460.6 million in the third quarter of fiscal 2003 compared to the same
period last year. Internal revenue growth of 26% resulted from ramp up of new
contracts in our state healthcare, workforce services and transportation
systems and services businesses. The remaining revenue growth was primarily due to the
impact of the AFSA acquisition in late fiscal 2002.

Revenue in our commercial segment,
which represents 33% of consolidated revenue for the
third quarter of fiscal 2003, increased $90.2 million, or 37%, to $330.9
million in the third quarter of fiscal 2003 compared to the same period last
year. Internal revenue growth of 20% was primarily driven by the ramp up of
new contracts in our information technology outsourcing, finance and
accounting, and human resource businesses. The remaining revenue growth was primarily
due to the impact of the AFSA and Andersen acquisitions closed in the fourth
quarter of fiscal 2002 and the CyberRep acquisition in fiscal 2003.

Revenue in our federal government
segment, which represents 21% of consolidated revenue for
the third quarter of fiscal 2003, increased $4.6 million, or 2%, to $214.2
million in the third quarter of fiscal 2003 compared to the same period last
year. Internal revenue growth of 3% for the quarter was primarily driven by
growth in services provided to Department of Defense agencies. Internal
revenue growth was negatively impacted by the June 2002 non-renewal of the
Senate desktop services contract.

Operating Expenses
As a percentage of revenue, our operating expenses decreased 0.2% to 86.6% in
the third quarter of fiscal 2003 from 86.8% in the third quarter of fiscal
2002. Our operating expenses increased $175.3 million, or 25.2% to $870.6
million in the third quarter of fiscal 2003 from $695.3 million in the third
quarter of fiscal 2002.

Wages and benefits increased $85.8 million, or 24.4% to $437.7 million. As a
percentage of revenue, wages and benefits decreased 0.3% to 43.5%, primarily
due to revenue generated on new contracts in our state and local government and
commercial segments that have a lower component of wages and benefits. The
decline was partially offset by the shift of costs on the Department of
Education contract from services and supplies to wages and benefits as a result
of the AFSA acquisition in late fiscal 2002. Prior to the

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acquisition, AFSA served as a sub-contractor on this contract, and therefore
the payments to AFSA were included in services and supplies. Subsequent to the
acquisition, AFSAs employee costs related to this contract are included in our
wages and benefits.

Services and supplies increased $50.1 million, or 20.8%, to $290.8 million. As
a percentage of revenue, services and supplies decreased 1.2% to 28.9%,
primarily due to the shift of costs on the Department of Education contract
discussed above, offset by higher costs related to new contracts in our state
and local government segment.

Rent, lease and maintenance increased $22.3 million, or 32.9%, to $90.1
million. As a percentage of revenue, rent, lease and maintenance increased
0.5% to 9.0% due to new information technology outsourcing contracts in our
commercial segment.

Depreciation and amortization increased $11.0 million, or 40.9%, to $37.9
million. As a percentage of revenue, depreciation and amortization increased
0.4%, to 3.8% due to capital expenditures during the last twelve months
resulting from our growth and increased intangible amortization as a result of
acquisitions occurring since the third quarter of fiscal 2002.

Other operating expenses increased $6.0 million, or 74.8%, to $14.1 million.
As a percentage of revenue, other operating expenses increased 0.4% to 1.4% due
to increased marketing and legal expenses, and provision for doubtful accounts.

Interest expense
Interest expense increased $0.3 million in the third quarter of fiscal 2003
compared to the third quarter of fiscal 2002, primarily as a result of higher
average outstanding balances on our credit facility offset by decreased
borrowing costs as a result of the conversion to equity of our 4.0% Convertible
Subordinated Notes in the third quarter of fiscal 2002.

Other non-operating expense, net
Other non-operating expense decreased $5.4 million in the third quarter of
fiscal 2003 compared to the third quarter of fiscal 2002 primarily due to the
write down of a cost-basis investment to its estimate of realizable value in
the third quarter of fiscal 2002.

Tax Expense
Our effective tax rate of approximately 37.5% in fiscal 2003 exceeds the
federal statutory rate of 35% due primarily to the net effect of state income
taxes. Included in tax expense in the third quarter of fiscal 2002 are certain
tax benefits of approximately $4.3 million resulting primarily from recently
enacted federal income tax rules that provide for a larger tax deduction
associated with our June 2000 divestitures and deferred tax adjustments to
reflect realization of tax deductions for which their probability is no longer
uncertain. Due to the effect of the tax benefits in fiscal 2002 above, our
effective tax rate increased 4.7% to 37.5% in the third quarter of fiscal 2003
from 32.8% in the third quarter of fiscal 2002.

COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2003 TO THE NINE MONTHS ENDED MARCH 31, 2002

Revenues
For the nine months ended March 31, 2003, our revenue increased $626.6 million,
or 28%, to $2.8 billion from $2.2 billion for the nine months ended March 31,
2002. Internal revenue growth for the nine months ended March 31, 2003 was 18%
and the remainder was due to growth from acquisitions.

Revenue in our state and local
segment, which represents 46% of consolidated revenue for the
first nine months of fiscal 2003, increased $369.9 million, or 40%, to $1.3
billion for the first nine months of fiscal 2003 compared to the same period
last year. Internal revenue growth of 28% was due to new contracts in our
state healthcare, workforce services and transportation systems and services
businesses. The remaining revenue growth is related to acquisitions.

Revenue in our commercial segment,
which represents 32% of consolidated revenue for the
first nine months of fiscal 2003, increased $215.1 million, or 31%, to $910.2
million for the first nine months of fiscal 2003 compared to the same period
last year. Internal revenue growth of 17% was driven by new contracts in IT
outsourcing, finance and accounting, and human resource businesses. The
remaining revenue growth is primarily due to the AFSA and Andersen acquisitions
in late fiscal 2002 and the CyberRep acquisition in fiscal 2003.

Revenue in our federal government segment, which represents 22% of consolidated revenue for
the first nine months of fiscal 2003, increased $41.6 million, or 7%, to $632.6
million for the first nine months of fiscal 2003 as compared to the same period
last year. Internal revenue growth of 6% was primarily driven by growth in
services provided to Department of Defense agencies. Internal revenue growth
was adversely impacted by the June 2002 non-renewal of the Senate desktop
services contract.

Operating Expenses
As a percentage of revenue, operating expenses decreased 0.5%, to 86.6% for the
first nine months of fiscal 2003 from 87.1% for the same period last year.
Operating expenses increased $531.2 million, or 27.6%, to $2.5 billion in the
first nine months of fiscal 2003 compared to $1.9 billion for the first nine
months of fiscal 2002.

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Wages and benefits increased $268.3 million, or 27.5%, to $1.2 billion. As a
percentage of revenue, wages and benefits decreased 0.3%, to 43.9% primarily
due to revenue generated on new contracts in our state and local government and
commercial segments that have a lower component of wages and benefits. The
decline was partially offset by the shift of costs on the Department of
Education contract from services and supplies to wages and benefits as a result
of the AFSA acquisition in late fiscal 2002. Prior to the acquisition, AFSA
served as a sub-contractor on this contract, and therefore the payments to AFSA
were included in services and supplies. Subsequent to the acquisition, AFSAs
employee costs related to this contract are included in our wages and benefits.

Services and supplies increased $158.9 million, or 24.9%, to $797.2 million.
As a percentage of revenue, services and supplies decreased 0.7% to 28.2%
primarily due to the shift of costs on the Department of Education contract
discussed above, offset by higher costs related to new contracts in our state
and local government segment.

Rent, lease and maintenance increased $54.7 million, or 26.5%, to $261.4
million. As a percentage of revenue, rent, lease and maintenance decreased
0.2%, to 9.2%. This decrease was due to the increase of BPO services in our
revenue mix which has a lower component of rent, lease and maintenance.

Depreciation and amortization increased $31.0 million, or 39.3%, to $109.8
million. As a percentage of revenue, depreciation and amortization increased
0.3%, to 3.9% due to capital expenditures during the last twelve months
resulting from our growth and increased intangible amortization as a result of
acquisitions occurring since the third quarter of fiscal 2002.

Other operating expenses increased $18.4 million, or 83.8%, to $40.3 million.
As a percentage of revenue, other operating expenses increased 0.4% to 1.4%,
due to increased legal costs, marketing expenses, provision for doubtful
accounts and other contract related expenses.

Interest expense
Interest expense decreased $6.7 million, or 25.9%, to $19.3 million in the
first nine months of fiscal 2003 compared to the first nine months of fiscal
2002, primarily as a result of the conversion of our 4% Convertible
Subordinated Notes to equity in the third quarter of fiscal 2002.

Other non-operating expense, net
Other non-operating expense decreased $3.1 million for the first nine months of
fiscal 2003 compared to the first nine months of fiscal 2002. Included in
fiscal 2002 was the write down of certain cost-method investments offset by
higher interest income on cash balances. Included in fiscal 2003 was the write
down of a note receivable in fiscal 2003 as well as lower interest income in
fiscal 2003 on cash balances.

Tax Expense
Our effective tax rate of approximately 37.5% in fiscal 2003 exceeds the
federal statutory rate of 35% due primarily to the net effect of state income
taxes. Included in tax expense in first nine months of fiscal 2002 are certain
one-time tax benefits of approximately $4.3 million resulting primarily from
recently enacted federal income tax rules that provide for a larger tax
deduction associated with our June 2000 divestitures and deferred tax
adjustments to reflect realization of tax deductions for which their
probability is no longer uncertain. Due to the effect of the tax benefits in
fiscal 2002, our effective tax rate increased 1.7% to 37.5% for the first nine
months of fiscal 2003 from 35.8% for the same period in fiscal 2002.

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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

We finance our ongoing business operations through cash flows from operations
and utilize excess cash flow combined with the issuance of debt and equity to
finance our acquisition strategy. One of our primary financial goals is to
maintain an adequate level of liquidity through active management of assets and
liabilities.

During the nine months ended March 31, 2003, we generated approximately $370.3
million in cash flow from operations versus approximately $218.1 million in the
same period in fiscal year 2002. Free cash flow was approximately $216.8
million for the first nine months of fiscal year 2003 compared to approximately
$117.5 million for the same period in fiscal year 2002. Free cash flow is
measured as operating cash flow (net cash provided by operating activities, as
reported in our consolidated statements of cash flow), less capital
expenditures (purchases of property, equipment and software, net of
disposals, as
reported in our consolidated statements of cash flow). The Company believes
free cash flow provides another measure of available cash flow after the
Company has satisfied the capital requirements of its operations. The
following table sets forth the calculation of free cash flow (in thousands):

|                                                            |  |                   |          |      |  |   |          |  
|----------------------------------------------------------- |  | ----------------- | -------- | ---- |  | - | -------- | -
|                                                            |  | Nine Months Ended
|                                                            |  | March 31,        
|                                                            |  |                  
|                                                            |  | 2003              |          | 2002
|                                                            |  |                   |          |     
|Net cash provided by operating activities                   |  | $                 | 370,302  |      |  | $ | 218,109  |  
|Purchases of property, equipment and
software, net of sales |  |                   | (153,543 | )    |  |   | (100,607 | )
|                                                            |  |                   |          |      |  |   |          |  
|Free cash flow                                              |  | $                 | 216,759  |      |  | $ | 117,502  |  
|                                                            |  |                   |          |      |  |   |          |  

During the nine months ended March 31, 2003, we used $231.8 million for
investing activities. This includes $153.5 million in fiscal year 2003 related
to the purchase of property, equipment and software versus $100.6 million in
the same period in fiscal year 2002. Our capital expenditures were
approximately 5.4% of total revenues. We used $53.0 million in cash for
payments related to recent acquisitions.

During the first nine months of fiscal year 2003, cash used by financing
activities was $136.9 million. We entered into a new $875.0 million credit
facility on terms generally similar to our existing credit facility, which was
partially used to refinance the $375.0 million interim credit facility used to
fund the AFSA acquisition and which replaced our existing $450.0 million credit
facility. Financing activities in the nine months ended March 31, 2002 included
our offering of 18.4 million shares of our Class A common stock (adjusted for
stock split). The shares were issued at $40.50 per share yielding proceeds of
$714.3 million (net of underwriters fees and other costs), which were used to
repay the $550.0 million 18-month interim credit facility incurred to fund the
IMS acquisition and a portion of the amount outstanding under our revolving
credit facility.

As of March 31, 2003, we had approximately $578.2 million of long-term debt
outstanding, which was primarily comprised of approximately $317.0 million of
our 3.5% Convertible Subordinated Notes due February 15, 2006 and approximately
$255.3 million outstanding under our $875.0 million credit facility. At March
31, 2003, we had approximately $455.0 million available on our $875.0 million
revolving credit facility after considering outstanding letters of credit of
$165.0 million that secure certain contractual performance and other
obligations.

Due to the terrorist attacks on September 11, 2001 and the well-documented
bankruptcies of several large companies (e.g. Enron, Kmart, and WorldCom), the
surety bond market has substantially changed, resulting in reduced availability
of bonds and increased premiums. Some of our state and local government
contracts require either a bond or a letter of credit and future requests for
proposals may require a surety bond or letter of credit. Notwithstanding the
existing condition of the surety bond market, management believes that we have
sufficient liquidity from our cash flow and under our revolving credit facility
to meet ongoing business needs and to respond to future requests for proposals
from state and local governments.

At March 31, 2003, we had cash and cash equivalents of $35.4 million compared
to $33.8 million at June 30, 2002. Our working capital (defined as current
assets of $959.1 million less current liabilities of $538.5 million) increased
$31.9 million to $420.5 million at March 31, 2003 from $388.6 million at June
30, 2002 primarily due to strong cash flows from operations for the nine months
ended March 31, 2003. Our current ratio (defined as total current assets of
$959.1 million divided by total current liabilities of $538.5 million) was 1.8
at March 31, 2003 and June 30, 2002 and our debt to capitalization ratio
(defined as the sum of short-term and long-term debt divided by the sum of
short-term and long-term debt and equity) was 19.9% and 25.3% at March 31, 2003
and June 30, 2002, respectively.

As of June 30, 2002, we held a minority preferred stock interest in DDH
Aviation, Inc., a corporate airplane brokerage company organized in 1997
(DDH). Our Chairman owns a majority voting interest in DDH and our President
and General Counsel, along with our Chairman were directors of DDH. At June
30, 2002, DDH had a $48 million line of credit with Citicorp USA, Inc., for
which we and our Chairman, in exchange for warrants to acquire additional
voting stock, acted as partial guarantors. In addition, we obtained access to
corporate aircraft at favorable rates in consideration of our guaranty. We had
guaranteed up to approximately $11.5 million of the line of credit and our
Chairman guaranteed up to approximately $17.5 million of the line of credit.

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Subsequent to June 30, 2002, our Chairman assumed in full our guaranty
obligations to Citicorp and our guaranty to Citicorp was released in full.
Our minority preferred stock interest and warrants (with a recorded value of
$100,000 at June 30, 2002) in DDH were cancelled. We have no further
contingent liability related to DDH debt and no ownership interest in DDH. Our
officers, other than the Chairman, are no longer directors of DDH. In July
2002, we purchased $1.0 million in prepaid charter flights at favorable rates
from DDH.

Management believes that available cash and cash equivalents, together with
cash generated from operations and available borrowings under our credit
facility, will provide adequate funds for our anticipated internal growth
needs, including capital expenditures. Our management also believes that cash
provided by operations will be sufficient to satisfy all existing debt
obligations as they become due. However, we intend to continue our growth
through acquisitions and from time to time to engage in discussions with
potential acquisition candidates, which could require significant commitments
of capital. In order to pursue such opportunities we may be required to incur
debt or to issue additional potentially dilutive securities in the future. No
assurance can be given as to our future acquisitions and expansion
opportunities and how such opportunities will be financed.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS AS OF MARCH 31, 2003 (IN THOUSANDS):

|                                   |  |       |         |        |  |                        |        |           |  |               |         |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | ----- | ------- | ------ |  | ---------------------- | ------ | --------- |  | ------------- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                   |  |       |         |        |  | Payments Due by Period
|                                   |  |       |         |        |  |                       
|                                   |  |       |         |        |  | Less than              |        |           |  |               |         |  |  |   |        |  |  |  
|Contractual Obligations            |  | Total |         | 1 Year |  | 1-3 Years              |        | 3-5 Years |  | After 5 Years
|                                   |  |       |         |        |  |                        |        |           |  |              
|Long-term debt                     |  | $     | 572,290 |        |  | $                      |       |           |  | $             | 572,290 |  |  | $ |       |  |  | $ |       | 
|Capital lease obligations          |  |       | 5,882   |        |  |                        | 1,991  |           |  |               | 2,515   |  |  |   | 1,376  |  |  |   |       | 
|Operating leases                   |  |       | 321,616 |        |  |                        | 92,520 |           |  |               | 120,135 |  |  |   | 61,213 |  |  |   | 47,748 | 
|                                   |  |       |         |        |  |                        |        |           |  |               |         |  |  |   |        |  |  |   |        | 
|Total Contractual Cash Obligations |  | $     | 899,788 |        |  | $                      | 94,511 |           |  | $             | 694,940 |  |  | $ | 62,589 |  |  | $ | 47,748 | 
|                                   |  |       |         |        |  |                        |        |           |  |               |         |  |  |   |        |  |  |   |        | 

|                             |  |           |         |             |  |                                            |         |           |  |               |        |  |  |   |    |  |  |   |   | 
|---------------------------- |  | --------- | ------- | ----------- |  | ------------------------------------------ | ------- | --------- |  | ------------- | ------ |  |  | - | -- |  |  | - | - | 
|                             |  |           |         |             |  | Amount of Commitment Expiration per Period
|                             |  |           |         |             |  |                                           
|                             |  | Total     |         |             |  |                                            |         |           |  |               |        |  |  |   |    |  |  |  
|                             |  | Amounts   |         | Less than 1 |  |                                            |         |           |  |               |        |  |  |   |    | 
|Other Commercial Commitments |  | Committed |         | Year        |  | 1-3 Years                                  |         | 3-5 Years |  | After 5 Years
|                             |  |           |         |             |  |                                            |         |           |  |              
|Standby letters of credit    |  | $         | 165,464 |             |  | $                                          | 164,464 |           |  | $             | 1,000  |  |  | $ |   |  |  | $ |  | 
|Surety Bonds                 |  |           | 324,487 |             |  |                                            | 303,725 |           |  |               | 20,745 |  |  |   | 17 |  |  |   |  | 
|                             |  |           |         |             |  |                                            |         |           |  |               |        |  |  |   |    |  |  |   |   | 
|Total Commercial Commitments |  | $         | 489,951 |             |  | $                                          | 468,189 |           |  | $             | 21,745 |  |  | $ | 17 |  |  | $ |  | 
|                             |  |           |         |             |  |                                            |         |           |  |               |        |  |  |   |    |  |  |   |   | 

We are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
March 31, 2003, the maximum aggregate amount of the outstanding contingent
obligations is approximately $20.4 million. Upon satisfaction of the specified
contractual criteria, a corresponding increase in goodwill would be recorded.

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. We base our estimates on historical experience and on various other
assumptions or conditions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates under different
assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. We believe that the
following critical accounting policies involve significant judgments and
estimates used in the preparation of our consolidated financial statements.

Revenue recognition. Our policy follows the guidance from Staff Accounting
Bulletin 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements. We recognize revenues when persuasive evidence of an
arrangement exists, the product has been shipped or the services have been
provided to the client, the sales price is fixed or determinable, and
collectibility is reasonably assured.

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Approximately two-thirds of our revenue is recognized based on transaction
volumes, approximately 12% is related to time and material contracts,
approximately 16% is related to cost reimbursable contracts, and approximately
6% of our revenues are recognized using percentage-of-completion accounting.

Generally, information technology processing revenues are recognized as
services are provided to the client. Revenues from annual maintenance contracts
are deferred and recognized ratably over the maintenance period. Revenues from
hardware sales are recognized upon delivery to the client and when
uncertainties regarding customer acceptance have expired.

Revenues for business process outsourcing services are normally recognized on
the basis of the number of accounts or transactions processed.

In the federal government segment, our contracts are typically cost
reimbursable, fixed price, unit price, or time and material contracts. Revenues
on cost reimbursable contracts are recognized by applying an estimated factor
to costs as incurred, such factor being determined by the contract provisions
and prior experience. Revenues on unit-price contracts are recognized at the
contractual selling prices of work completed and accepted by the client.
Revenues on time and material contracts are recognized at the contractual rates
as the labor hours and direct expenses are incurred.

Revenues on certain fixed price contracts where we provide information
technology development and implementation services and certain contracts in our
federal government segment are recognized over the contract term based on the
percentage of services that are provided during the period compared with the
total estimated services to be provided over the entire contract using
Statement of Position 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts (SOP 81-1). SOP 81-1 requires the use
of percentage-of-completion accounting for long-term contracts that are binding
agreements between us and our customers in which we agree, for compensation, to
perform a service to the customers specifications. Performance will often
extend over long periods, and our right to receive payment depends on our
performance in accordance with the agreement.

The percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost
basis, using a reasonably consistent profit margin over the period. Due to the
long-term nature of these contracts, developing the estimates of costs often
requires significant judgment. Factors that must be considered in estimating
the progress of work completed and ultimate cost of the contract include, but
are not limited to, the availability of labor and labor productivity, the
nature and complexity of the work to be performed, the impact of delayed
performance, and availability and timing of funding from the client. If
changes occur in delivery, productivity or other factors used in developing the
estimates of costs or revenues, we revise our cost and revenue estimates, which
may result in increases or decreases in revenues and costs, and such revisions
are reflected in income in the period in which the facts that give rise to that
revision become known.

Emerging Issues Task Force Issue 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables (EITF 00-21) addresses the accounting treatment
for an arrangement to provide the delivery or performance of multiple products
and/or services where the delivery of a product or system or performance of
services may occur at different points in time or over different periods of
time. The arrangements are often accompanied by initial installation or
initiation services and involve either a fixed fee or a fixed fee coupled with
a continuing payment stream, which may be fixed or variable. The EITF reached a
consensus regarding, among other issues, the applicability of the provisions
regarding separation of contract elements in EITF 00-21 to contracts where one
or more elements fall within the scope of other authoritative literature, such
as SOP 81-1. EITF 00-21 does not impact the use of SOP 81-1 for contracts that
fall within the scope of SOP 81-1, such as the implementation or development of
an information technology system to client specifications under a long-term
contract. Where an implementation or development project is contracted with a
client, and we will also provide services or operate the system over a period
of time, EITF 00-21 provides the methodology for separating the contract
elements and allocating total arrangement consideration to the contract
elements. The provisions of EITF 00-21 will be applicable on a prospective
basis to transactions entered into in fiscal years beginning after June 15,
2003. We believe that EITF 00-21 will not have a material impact on our
financial position or results of operations.

Revenues earned in excess of related billings are accrued, whereas billings in
excess of revenues earned are deferred until the related services are provided.
Immediate recognition is made of any anticipated losses.

Valuation of goodwill and
intangibles. Due to the fact that we are a services
company, our business acquisitions typically result in goodwill and other
intangible assets, which affect the amount of future period amortization
expense and possible impairment expense that we could incur. The determination
of the value of goodwill and other intangibles requires us to make estimates
and assumptions about future business trends and growth. For the IMS,
Andersen, and AFSA acquisitions in 2002 and the CyberRep acquisition in 2003,
we obtained a third-party valuation of the intangible assets. If an event
occurs which would cause us to revise our estimates and assumptions used in
analyzing the value of our goodwill or other intangibles, such revision could
result in an impairment charge that could have a material impact on our
financial results.

Allowance for doubtful accounts. We make estimates of the collectibility of our
accounts receivable. We specifically analyze accounts receivable and
historical bad debts, customer credit-worthiness, current economic trends, and
changes in our customer

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payment terms and collection trends when evaluating the adequacy of our
allowance for doubtful accounts. Any change in the assumptions used in
analyzing a specific account receivable may result in additional allowance for
doubtful accounts being recognized in the period in which the change occurs.

NEW ACCOUNTING STANDARDS

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS 148). SFAS 148 provides
alternative methods of transition for a voluntarily change to the fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. We adopted the disclosure requirements of SFAS 148 effective
for the quarter ended March 31, 2003, the additional information required by
SFAS 148 is included in our financial statement disclosures beginning with this
reporting period (see Note 2 of our Consolidated Financial Statements). We do
not believe that SFAS 148 had material impact on our financial position or
results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others (FIN 45). FIN 45 requires that a
guarantor recognize a liability at inception of certain guarantees and disclose
certain other types of guarantees, even if the likelihood of requiring the
guarantors performance is remote. The initial recognition and measurement
provisions of FIN 45 are applicable to guarantees issued or modified after
December 31, 2002. The disclosure provisions of FIN 45 are effective for
financial statements that end after December 15, 2002. The adoption of FIN 45
did not have a material effect on our financial position or results of
operations.

EITF 00-21 addresses the accounting treatment for an arrangement to provide the
delivery or performance of multiple products and/or services where the delivery
of a product or system or performance of services may occur at different points
in time or over different periods of time. See Critical Accounting Policies for
further discussion of EITF 00-21.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS
146), which changes the rules for how companies must account for costs
associated with exit or disposal activities. Costs typically associated with
exit or disposal activities include one-time employee termination costs,
contract cancellation provisions, and relocation costs. SFAS 146 nullifies EITF
Issue 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of the new standard are effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. We do not believe that SFAS 146 will have a material impact on our
future earnings and financial condition.

RISKS RELATED TO OUR BUSINESS

The risks described below should not be considered to be comprehensive and
all-inclusive. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any
events occur that give rise to the following risks, our business, financial
condition, or results of operations could be materially and adversely affected,
and as a result, the trading price of our Class A common stock could be
materially and adversely impacted. These risk factors should be read in
conjunction with other information set forth in this report, including our
Consolidated Financial Statements and the related notes.

Loss of, or reduction of business from,
clients. The loss of clients and/or the
reduction of volumes and services provided to our clients could materially
affect our profitability and cash flows. In addition, we incur a high level of
fixed costs related to our technology outsourcing and business process
outsourcing clients. Therefore the loss of any one of our significant clients
could leave us with a significantly higher level of fixed costs than is
necessary to serve our remaining clients, thereby reducing our revenues,
profitability and cash flow.

Termination of a contract by a client or deterioration of the financial
condition of a client. We must make significant capital investments in order to
attract and retain large outsourcing agreements. The termination of a client
contract or the deterioration of the financial condition or prospects of a
client has in the past, and may in the future, result in an impairment of the
net book value of the assets recorded, including a portion of our intangible
assets, and a reduction in our earnings and cash flow.

Competition. We expect to encounter additional competition as we address new
markets and new competitors enter our existing markets. If we are forced to
lower our pricing or if demand for our services decreases, our business,
financial condition, results of operations, and cash flow may be materially and
adversely affected. Many of our competitors have greater resources, and they
may be able to use their resources to adapt more quickly to new or emerging
technologies or to devote greater resources to the promotion and sale of their
products and services. In addition, we must frequently compete with a clients
own internal business process and information technology capabilities, which
may constitute a fixed cost for the client.

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Difficulties in executing our acquisition
strategy. We intend to continue to
expand our business through the acquisition of complementary companies. We
cannot, however, make any assurances that we will be able to identify any
potential acquisition candidates or consummate any additional acquisitions or
that any future acquisitions will be successfully integrated or will be
advantageous to us. Without additional acquisitions, we are unlikely to
maintain historical total growth rates.

Failure to properly manage our operations and
our growth. We have rapidly
expanded our operations in recent years. We intend to continue expansion in the
foreseeable future to pursue existing and potential market opportunities. This
rapid growth places a significant demand on our management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures, and controls on a timely basis. If we fail
to implement these systems, procedures and controls on a timely basis, we may
not be able to service our clients needs, hire and retain new employees,
pursue new business, complete future acquisitions or operate our businesses
effectively. We could also trigger
contractual credits to clients. Failure to properly integrate acquired
operations with vendors systems could result in increased cost.

Government clients  termination rights,
audits and investigations. A
substantial portion of our revenues are derived from contracts with the United
States government and its agencies and from contracts with state and local
governments and their agencies. Governments and their agencies may terminate
most of these contracts at any time, without cause. Also, our federal
government contracts are subject to the approval of appropriations being made
by the United States Congress to fund the expenditures to be made by the
federal government under these contracts. Additionally, government contracts
are generally subject to audits and investigations by government agencies. If
the government finds that we improperly charged any costs to a contract, the
costs are not reimbursable or, if already reimbursed, the cost must be refunded
to the government. If the government discovers improper or illegal activities
in the course of audits or investigations, the contractor may be subject to
various civil and criminal penalties and administrative sanctions, which may
include termination of contracts, forfeiture of profits, suspension of
payments, fines and suspensions or debarment from doing business with the
government. Any resulting penalties or sanctions could have a material adverse
effect on our business, financial results and cash flow.

Exercise of contract termination provisions and
service level penalties. Most
of our contracts with our clients permit termination in the event our
performance is not consistent with service levels specified in those contracts,
or provide for credits to our clients for failure to meet service levels. In
addition, if clients are not satisfied with our level of performance, our
reputation in the industry may suffer, which could materially and adversely
affect our business, financial condition, results of operations, and cash flow.

Pricing risks. Some of our contracts contain provisions requiring that our
services be priced based on a pre-established standard or benchmark regardless
of the costs we incur in performing these services. Some of our contracts
contain pricing provisions that require the client to pay a set fee for our
services regardless of whether our costs to perform these services exceed the
amount of the set fee. Some of our contracts contain re-pricing provisions
which can result in reductions of our fees for performing our services. In
such situations, we are exposed to the risk that we may be unable to price our
services to levels that will permit recovery of our costs, and may adversely
affect our operating results and cash flow.

Loss of significant software vendor relationships. Our ability to service our
clients depends to a large extent on our use of various software programs that
we license from a small number of primary software vendors. If our significant
software vendors were to terminate or refuse to renew our contracts with them,
we might not be able to replace the related software programs and would be
unable to serve our clients, which could have a material adverse effect on our
business, revenues, profitability and cash flow.

Rapid technological changes. The markets for our information technology
services are subject to rapid technological changes and rapid changes in client
requirements. We may be unable to timely and successfully customize products
and services that incorporate new technology or to deliver the services and
products demanded by the marketplace.

Intellectual property infringement claims. We rely heavily on the use of
intellectual property. We do not own the majority of the software that we use
to run our business; instead we license this software from a small number of
primary vendors. If these vendors assert claims that we or our clients are
infringing on their software or related intellectual property, we could incur
substantial costs to defend these claims. In addition, if any of our vendors
infringement claims are ultimately successful, our vendors could require us (1)
to cease selling or using products or services that incorporate the challenged
software or technology, (2) to obtain a license or additional licenses from our
vendors, or (3) to redesign our products and services which rely on the
challenged software or technology.

Federal regulations relating to confidentiality of health data. In 1996,
Congress passed the Health Insurance Portability and Accountability Act
(HIPAA) and as required therein, the Secretary of Health and Human Services
(HHS) has established standards for information sharing, security and
confidentiality with regard to health information of individuals. We process
individually identifiable health information for many of our clients. We and
our clients are required to comply with HIPAA and we will be
required to comply with HIPAA for individually identifiable health information
which we maintain for our employees. Health information privacy regulations
promulgated under HIPAA took effect on April 14, 2003. On or prior to that
date we implemented procedures, training and security features designed to
protect the privacy and integrity of such health information. Other
regulations have been published under HIPAA (such as those related to the
standardization of information used in processing healthcare

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transactions which
require compliance by October 2003 and those related to additional security
measures that must be implemented by April 2005) and other regulations required
by HIPAA have yet to be published. In addition, various states, including
Texas, have passed legislation that addresses medical record privacy and
restricts the use and disclosure of individually identifiable health
information, and other federal or state privacy legislation may be enacted at
any time. HIPAA subjects us, as a service provider and as an employer, to
liability and monetary penalties for failure to comply with HIPAA regulations.
If we fail to comply with HIPAA regulations and applicable state laws, we could
incur liability under these provisions, which could have a material adverse
effect on our profitability and cash flow.

Budget deficits at state and local governments and their agencies. A
substantial portion of our revenues are derived from contracts with state and
local governments and their agencies. Currently, many state and local
governments that we have contracts with are facing potential budget deficits.
While this has not had a material adverse impact on our results of operations
through the third quarter of fiscal year 2003, it is unclear what impact, if
any, these deficits may have on our future business, revenues, results of
operations and cash flow.

Inability to provide contract performance guarantees. Certain of our state and
local government contracts require we execute surety bonds or letters of credit
to ensure that the project is administered and completed as provided for in the
contract. Prior to September 11 and the well-documented bankruptcies of several
large companies (e.g. Enron, Kmart, and WorldCom), surety bonds were obtainable
on relatively favorable terms at minimal pricing. In late 2001, the market for
surety bonds changed dramatically with capacity tightening and prices
increasing. In certain situations, we have found it more economical to satisfy
our obligations under certain state and local contracts with letters of credit
under our revolving credit facility. The long-term outlook of the surety
market, while improving, remains unclear. If conditions require us to continue
utilizing letters of credit under our credit facility (in lieu of bonds), our
borrowing capacity under our revolving credit facility will be reduced by the
amount of such letters of credit outstanding.

International risks. Recently we have expanded our international operations.
International operations are subject to a number of risks including, but
limited to the following  fluctuations in foreign exchange currency rates;
licensing and labor counsel requirements; staffing key managerial positions;
data privacy laws adopted by various countries in which ACS does business,
including but not limited to member states of the European Union; general
economic conditions in foreign countries; additional expenses and risks
inherent in conducting operations in geographically distant locations; laws of
those foreign countries; political instability; trade restrictions such as
tariffs and duties or other controls affecting foreign operations, and other
factors that may adversely affect the Companys business, financial condition
and operating results.

Armed hostilities and terrorist attacks. Terrorist attacks and further acts of
violence or war may cause major instability in the U.S. and other financial
markets in which we operate. In addition, armed hostilities and acts of
terrorism may directly impact our physical facilities and operations, which are
located in North America, Central America, South America, Europe, Africa,
Australia, and the Middle East, or those of our clients. These developments
subject our worldwide operations to increased risks and, depending on their
magnitude, could have a material adverse effect on our business.

Failure to attract and retain necessary technical personnel and skilled
management. Our success depends to a significant extent upon our ability to
attract, retain and motivate highly skilled and qualified personnel. If we
fail to attract, train, and retain, sufficient numbers of these
technically-skilled people, our business, financial condition, and results of
operations will be materially and adversely affected. Our success also depends
on the skills, experience, and performance of key members of our management
team. The loss of any key employee could have an adverse effect on our
business, financial condition, cash flow and results of operations and
prospects.

Other Risks. We have attempted to identify material risk factors currently
affecting our business and company. However, additional risks that we do not
yet know of, or that we currently think are immaterial, may occur or become
material. These risks could impair our business operations or adversely affect
revenues or profitability.




ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures, as defined in Exchange Act
Rule 15d-14(c). Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective in enabling the Company to record,
process, summarize and report information required to be disclosed in the
Companys periodic filings with the Securities and Exchange Commission within
the required time period. There have been no significant changes in the
Companys internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out its
evaluation.

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PART II




ITEM 1. LEGAL PROCEEDINGS

On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by 21 former employees of Gibraltar
Savings Association and/or First Texas Savings Association (collectively,
GSA/FTSA). The GSA/FTSA employees alleged that they were entitled to the
value of 803,082 shares of our stock (adjusted for February 2002 stock split)
pursuant to options issued to the GSA/FTSA employees in 1988 in connection with
a former technology outsourcing services agreement between GSA/FTSA and us.
The judgment against us was for approximately $17 million, which includes
attorneys fees and pre-judgment interest, but excludes additional attorneys
fees of approximately $0.9 million and post-judgment interest at the
statutorily mandated rate of 10% per annum, which could be awarded in the event
the plaintiffs are successful upon appeal and final judgment. The judgment was
appealed by the plaintiffs and us.

On August 29, 2002, the Fourteenth Court of Appeals, Houston, Texas, reversed
the trial courts judgment and remanded the case to the trial court for further
proceedings. However, the court of appeals affirmed the trial court judgment
in part as to one of the plaintiffs. The court of appeals also held that the
trial court did not err in dismissing certain of our affirmative defenses at a
pretrial conference. We and the plaintiffs filed motions for rehearing with the
court of appeals. On January 16, 2003, the court of appeals denied both
motions for rehearing (except the court reversed its previous ruling that the
trial court should have applied prejudgment interest at 6% rather than 10%).

On March 3, 2003 we filed a Petition for Review with the Texas Supreme Court
requesting that the Court reverse the decision of the court of appeals and
render judgment that the plaintiffs take nothing or, alternatively, remand the
case to the trial court for further proceedings. The plaintiffs did not file a
petition for review with the Texas Supreme Court.

We continue to believe that we have a meritorious defense to all or a
substantial portion of the plaintiffs claims, and accordingly, have not
accrued any amount on our balance sheet related to the lawsuit.

In addition to the foregoing, we are subject to certain other legal
proceedings, claims and disputes which arise in the ordinary course of
business. Although we cannot predict the outcomes of these legal proceedings,
we do not believe these actions, in the aggregate, will have a material adverse
effect on our financial position, results of operations or liquidity.




ITEM 5. OTHER INFORMATION

One of our subsidiaries, ACS Defense, Inc., and other government contractors
received a grand jury document subpoena issued by the U.S. District Court for
the District of Massachusetts in October 2002. The subpoena was issued in
connection with an inquiry being conducted by the Antitrust Division of the
U.S. Department of Justice. The inquiry concerns certain IDIQ (Indefinite
Delivery  Indefinite Quantity) procurements and their related task orders
which occurred in the late 1990s at Hanscom Air Force Base in Massachusetts.
Our revenue from the contracts that we believe to be the focus of the Justice
Departments inquiry is approximately $25 million per year representing
approximately 0.6% of our annual revenue. Due to the preliminary nature of the
governments inquiry, we are not able to assess the impact, if any, of this
inquiry on ACS. However, we have conducted and are continuing to conduct an
internal investigation of this matter through outside legal counsel. We
continue to cooperate with the Department of Justice in producing documents in
response to the subpoena and arranging for Department of Justice interviews of
employees and former employees.

In December 2002, we appointed American Stock Transfer & Trust Company as our
transfer agent, replacing First City Transfer Company.

24



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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|a.) |  | Exhibits
|--- |  | --------



| | 99.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 9.06 of the
Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this
Exhibit is furnished to the SEC and shall not be deemed to be
filed.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 99.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 9.06 of the
Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this
Exhibit is furnished to the SEC and shall not be deemed to be
filed.



|b.) |  | Reports on Form 8-K
|--- |  | -------------------



| | 1. |  | On February 3, 2003, the Company filed a Current Report on Form
8-K (dated as of January 31, 2003) announcing that the U.S.
Department of Education (DOE) has advised the Registrant that the
DOE plans to conduct a competitive bid process for the currently
existing Direct Loan Servicing System contract between the Registrant
and DOE.                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | On February 14, 2003, the Company filed a Current Report on
Form 8-K (dated as of February 14, 2003) reporting that Jeffrey A.
Rich, Chief Executive Officer and Warren Edwards, Executive Vice
President and Chief Financial Officer, each submitted to the
Securities and Exchange Commission his certifications pursuant to 18
U.S.C., Section 1350, as adopted pursuant to Section 9.06 of the
Sarbanes-Oxley Act of 2002.

25



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 15th day of May, 2003.

| |  |                                    |  |                                                                       
| |  | ---------------------------------- |  | ----------------------------------------------------------------------
| |  | AFFILIATED COMPUTER SERVICES, INC.
| |  |                                    |  |                                                                       
| |  | By:                                |  | /s/ Warren D. Edwards                                                 
| |  |                                    |  |                                                                       
| |  |                                    |  | Warren D. Edwards
Executive Vice President and
Chief Financial Officer

26



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##### Table of Contents



Certification
pursuant to and in connection with the
Quarterly Reports on Form 10-Q
to be filed under Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended

I, Jeffrey A. Rich, Chief Executive Officer of Affiliated Computer
Services, Inc. (the Registrant), certify that:



|1. |  | I have reviewed this quarterly report of the Registrant on Form 10-Q for
the period ending March 31, 2003;                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The Registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the Registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The Registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrants auditors and the audit
committee of Registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrants
ability to record, process, summarize and report financial data and
have identified for the Registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants
internal controls; and                                                                                                                                        



|6. |  | The Registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    |  |                                                                                | 
| | ------------------ |  | ------------------------------------------------------------------------------ | 
| | Date: May 15, 2003 |  | /s/ Jeffrey A. Rich                                                            | 
| |                    |  |                                                                                | 
| |                    |  | Jeffrey A. Rich,
Chief Executive Officer of Affiliated Computer
Services, Inc. | 

27



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##### Table of Contents



Certification
pursuant to and in connection with the
Quarterly Reports on Form 10-Q
to be filed under Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended

I, Warren D. Edwards, Executive Vice President and Chief Financial Officer
of Affiliated Computer Services, Inc. (the Registrant), certify that:



|1. |  | I have reviewed this quarterly report of the Registrant on Form 10-Q for
the period ending March 31, 2003;                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The Registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the Registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The Registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrants auditors and the audit
committee of Registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrants
ability to record, process, summarize and report financial data and
have identified for the Registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants
internal controls; and                                                                                                                                        



|7. |  | The Registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                    |  |                                                                                                               |  | 
| |  | ------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | 
| |  | Date: May 15, 2003 |  | /s/ Warren D. Edwards                                                                                         |  | 
| |  |                    |  |                                                                                                               |  | 
| |  |                    |  | Warren D. Edwards,
Executive Vice President and Chief Financial
Officer of Affiliated Computer Services, Inc. |  | 

28



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                   
|Number  |  | Exhibit Name                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                   
|99.1    |  | Certification of Chief Executive Officer pursuant to 18
U.S.C., Section 1350, as adopted pursuant to Section 9.06 of
the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release
34-47551, this Exhibit is furnished to the SEC and shall not
be deemed to be filed.
|        |  |                                                                                                                                                                                                                                                                   
|99.2    |  | Certification of Chief Financial Officer pursuant to 18
U.S.C., Section 1350, as adopted pursuant to Section 9.06 of
the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release
34-47551, this Exhibit is furnished to the SEC and shall not
be deemed to be filed.

29