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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended     September 30, 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     001-12665

AFFILIATED COMPUTER SERVICES, INC.




(Exact name of registrant as specified in its charter)


Delaware
    
    51-0310342(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)


2828 North Haskell, Dallas, Texas
    
    
    75204(Address of principal executive offices)
    
    
    (Zip Code)


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 ofTitle of each class
    
    November 11, 2003Class A Common Stock, $.01 par value
    
    
    124,663,189Class B Common Stock, $.01 par value
    
    
    6,599,372131,262,561






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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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                  | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II                                          
|                                                  | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS                                      
|                                                  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                       
|INDEX TO EXHIBITS                                
|EX-10.1 Stock Purchase Agreement                 
|EX-10.2 Asset Purchase Agreement                 
|EX-31.1 Certification of Chief Executive Officer 
|EX-31.2 Certification of Chief Financial Officer 
|EX-32.1 Certification of CEO Pursuant to Sec. 906
|EX-32.2 Certification of CFO Pursuant to Sec. 906



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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

INDEX

PAGENUMBERPART I
    
    FINANCIAL INFORMATIONItem 1
    
    Consolidated Financial Statements:Consolidated Balance Sheets at September 30, 2003 and
    
    
    1June 30, 2003Consolidated Statements of Income for the Three Months
    
    
    2Ended September 30, 2003 and 2002Consolidated Statements of Cash Flows for the Three Months Ended
    
    
    3September 30, 2003 and 2002Notes to Consolidated Financial Statements
    
    
    4  10Item 2
    
    Management's Discussion and Analysis of Financial Condition and
    
    
    11  21Results of OperationsItem 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4
    
    Controls and Procedures
    
    
    21PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    22Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    23






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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS







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

September 30,
    
    June 30,2003
    
    2003(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,413
    
    
    $
    51,170Accounts receivable, net
    
    
    759,079
    
    
    
    835,478Inventory
    
    
    6,599
    
    
    
    6,245Other current assets
    
    
    87,985
    
    
    
    86,605Assets held for sale
    
    
    349,271
    
    
    
    Total current assets
    
    
    1,239,347
    
    
    
    979,498Property, equipment and software, net
    
    
    439,981
    
    
    
    478,212Goodwill, net
    
    
    1,764,150
    
    
    
    1,905,878Intangibles, net
    
    
    255,648
    
    
    
    265,091Other long-term assets
    
    
    68,535
    
    
    
    70,026Total assets
    
    $
    3,767,661
    
    
    $
    3,698,705LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    45,101
    
    
    $
    58,376Accrued compensation and benefits
    
    
    77,552
    
    
    
    132,027Other accrued liabilities
    
    
    259,874
    
    
    
    272,578Income taxes payable
    
    
    31,635
    
    
    
    17,057Deferred taxes
    
    
    34,342
    
    
    
    26,054Current portion of long-term debt
    
    
    2,197
    
    
    
    1,764Current portion of unearned revenue
    
    
    42,501
    
    
    
    49,620Liabilities related to assets held for sale
    
    
    66,732
    
    
    
    Total current liabilities
    
    
    559,934
    
    
    
    557,476Convertible notes
    
    
    316,990
    
    
    
    316,990Long-term debt
    
    
    190,208
    
    
    
    181,350Deferred taxes
    
    
    180,449
    
    
    
    176,484Other long-term liabilities
    
    
    35,263
    
    
    
    37,217Total liabilities
    
    
    1,282,844
    
    
    
    1,269,517Stockholders equity:Class A common stock
    
    
    1,269
    
    
    
    1,266Class B common stock
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,364,099
    
    
    
    1,358,418Accumulated other comprehensive income, net
    
    
    (2,176
    )
    
    
    (971
    )Retained earnings
    
    
    1,157,217
    
    
    
    1,070,409Treasury stock
    
    
    (35,658
    )
    
    
    Total stockholders equity
    
    
    2,484,817
    
    
    
    2,429,188Total liabilities and stockholders equity
    
    $
    3,767,661
    
    
    $
    3,698,705


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

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

Three Months EndedSeptember 30,2003
    
    2002Revenues
    
    $
    1,036,635
    
    
    $
    882,581Expenses:Wages and benefits
    
    
    477,112
    
    
    
    402,899Services and supplies
    
    
    264,964
    
    
    
    226,490Rent, lease and maintenance
    
    
    95,930
    
    
    
    84,335Depreciation and amortization
    
    
    41,411
    
    
    
    36,142Other operating expenses
    
    
    13,289
    
    
    
    13,060Total operating expenses
    
    
    892,706
    
    
    
    762,926Operating income
    
    
    143,929
    
    
    
    119,655Interest expense
    
    
    5,220
    
    
    
    7,054Other non-operating (income) expense, net
    
    
    (180
    )
    
    
    1,472Pretax profit
    
    
    138,889
    
    
    
    111,129Income tax expense
    
    
    52,081
    
    
    
    41,673Net income
    
    $
    86,808
    
    
    $
    69,456Earnings per common share:Basic
    
    $
    0.65
    
    
    $
    0.53Diluted
    
    $
    0.62
    
    
    $
    0.50Shares used in computing earnings per
common share:Basic
    
    
    133,235
    
    
    
    132,073Diluted
    
    
    143,960
    
    
    
    142,984


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

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

Three Months EndedSeptember 30,2003
    
    2002Cash flows from operating activities:Net income
    
    $
    86,808
    
    
    $
    69,456Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    41,411
    
    
    
    36,142Impairment of long-term assets
    
    
    
    
    
    
    1,400Tax benefit on stock options
    
    
    2,688
    
    
    
    1,024Deferred income tax expense
    
    
    21,671
    
    
    
    13,717Other non-cash activities
    
    
    4,099
    
    
    
    3,666Changes in assets and liabilities, net of effects from acquisitions:Increase in accounts receivable
    
    
    (72,994
    )
    
    
    (16,574
    )(Increase) decrease in inventory
    
    
    (657
    )
    
    
    750(Increase) decrease in other current assets
    
    
    (5,825
    )
    
    
    5,396Increase in other long-term assets
    
    
    (2,213
    )
    
    
    (2,817
    )Increase (decrease) in accounts payable
    
    
    (7,442
    )
    
    
    2,282Decrease in accrued compensation and benefits
    
    
    (26,628
    )
    
    
    (35,908
    )Increase (decrease) in other accrued liabilities
    
    
    7,113
    
    
    
    (4,385
    )Change in income taxes payable
    
    
    14,578
    
    
    
    15,611Decrease in unearned revenue
    
    
    (7,782
    )
    
    
    (6,638
    )Increase in other long-term liabilities
    
    
    4,555
    
    
    
    3,759Total adjustments
    
    
    (27,426
    )
    
    
    17,425Net cash provided by operating activities
    
    
    59,382
    
    
    
    86,881Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (42,760
    )
    
    
    (44,788
    )Payments for acquisitions, net of cash acquired
    
    
    (1,037
    )
    
    
    (4,905
    )Proceeds from divestitures, net of transaction costs
    
    
    (838
    )
    
    
    6,664Additions to other intangible assets
    
    
    (7,531
    )
    
    
    (14,842
    )Additions to notes receivable
    
    
    (335
    )
    
    
    (1,584
    )Proceeds received on notes receivable
    
    
    1,719
    
    
    
    6,335Other
    
    
    23
    
    
    
    50Net cash used in investing activities
    
    
    (50,759
    )
    
    
    (53,070
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    256,155
    
    
    
    425,458Repayments of debt
    
    
    (246,842
    )
    
    
    (439,066
    )Purchase of treasury shares
    
    
    (35,658
    )
    
    
    Proceeds from stock options exercised
    
    
    3,778
    
    
    
    589Other
    
    
    (813
    )
    
    
    (1,297
    )Net cash used in financing activities
    
    
    (23,380
    )
    
    
    (14,316
    )Net increase (decrease) in cash and cash equivalents
    
    
    (14,757
    )
    
    
    19,495Cash and cash equivalents at beginning of period
    
    
    51,170
    
    
    
    33,814Cash and cash equivalents at end of period
    
    $
    36,413
    
    
    $
    53,309


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

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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 with more than 40,000 people
supporting client operations in nearly 100 countries. We provide business
process and technology outsourcing solutions to world-class commercial and
government clients.

The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 2003. Certain
reclassifications have been made to prior period financial statements to
conform to current presentation. 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, 2003. 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
|-- |  | ------------------------

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 Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation, our net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):

Three Months EndedSeptember 30,2003
    
    2002Net IncomeAs reported
    
    $
    86,808
    
    
    $
    69,456Less: Pro forma employee
compensation cost of stock-based
compensation plans, net of tax
    
    
    4,806
    
    
    
    3,920Pro forma
    
    $
    82,002
    
    
    $
    65,536Basic earnings per shareAs reported
    
    $
    0.65
    
    
    $
    0.53Pro forma
    
    $
    0.62
    
    
    $
    0.50Diluted earnings per shareAs reported
    
    $
    0.62
    
    
    $
    0.50Pro forma
    
    $
    0.59
    
    
    $
    0.48


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



|3. |  | EQUITY
|-- |  | ------

On September 2, 2003, we announced that our Board of Directors authorized a
share repurchase program of up to $500 million of our Class A common stock
effective immediately. The program, which is open-ended, will allow us to
repurchase our shares on the open market from time to time in accordance with
Securities and Exchange Commission (SEC) rules and regulations, including
shares that could be purchased pursuant to SEC Rule 10b5-1. The number of
shares to be purchased and the timing of purchases will be based on the level
of cash and debt balances, general business conditions and other factors,
including alternative investment opportunities. We intend to fund the
repurchase program from various sources, including, but not limited to, cash
flow from operations, borrowings under our existing revolving credit facility
and, if consummated, proceeds from the sale of the majority of our federal
government business. As of September 30, 2003, we had repurchased 700,000
shares at a total cost of approximately $35.7 million. Through November 11,
2003, we have repurchased approximately 2.3 million shares at a total cost of
approximately $113.3 million.



|4. |  | ASSETS HELD FOR SALE
|-- |  | --------------------

In August 2003, we announced an agreement to sell the majority of our federal
government business to Lockheed Martin Corporation for approximately $658
million, which includes $70 million payable pursuant to a five-year
non-compete agreement. Revenues from the federal business to be divested were
approximately $685 million for fiscal 2003. This divestiture excludes our
Department of Education relationship, which during fiscal year 2003 had
revenues of approximately $172 million. Additionally, our commercial and
state and local government operations will continue to serve as a
subcontractor on portions of the transferred business. In addition, we will
acquire Lockheed Martin Corporations commercial information technology
business, with trailing, recurring annual revenues of approximately $240
million, for approximately $107 million. These transactions, which are
subject to certain closing conditions, are expected to be completed during
the second quarter of fiscal 2004. The expected after-tax proceeds from the
divestiture will generally be used to pay down debt, fund our share
repurchase program and for general corporate purposes. Revenues from the
business to be divested were $177 million and $165 million for the three
months ended September 30, 2003 and 2002, respectively.

At September 30, 2003, we classified as held for sale those assets and
liabilities related to that portion of our federal government business
expected to be disposed of in our previously announced pending sale.
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets requires that depreciation and
amortization of long-lived assets held for sale be suspended during the
holding period prior to sale. Accordingly, during the first quarter ended
September 30, 2003, we suspended depreciation and amortization in the amount
of $4.3 million ($2.7 million, net of tax) related to those long-lived assets
classified as held for sale. The following table sets forth the assets and
liabilities included in assets held for sale and the related liabilities as
of September 30, 2003 (in thousands):

Assets held for saleAccounts receivable, net
    
    $
    148,729Property, equipment and software, net
    
    
    48,863Intangible assets, net
    
    
    3,587Goodwill, net
    
    
    142,513Other assets
    
    
    5,579Total assets held for sale
    
    $
    349,271


Liabilities related to assets held for saleAccounts payable
    
    $
    5,833Accrued compensation and benefits
    
    
    27,847Accrued liabilities
    
    
    20,867Deferred taxes
    
    
    10,503Other liabilities
    
    
    1,682Total liabilities related to assets held for sale
    
    $
    66,732


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



|5. |  | GOODWILL AND OTHER INTANGIBLE ASSETS
|-- |  | ------------------------------------

The changes in the carrying amount of goodwill for the three months ended
September 30, 2003 are as follow (in thousands):

State and LocalGovernment
    
    Commercial
    
    Federal Government
    
    TotalBalance as of June 30, 2003
    
    $
    1,079,284
    
    
    $
    690,287
    
    
    $
    136,307
    
    
    $
    1,905,878Goodwill activity during the period
    
    
    1,027
    
    
    
    (6,448
    )
    
    
    (136,307
    )
    
    
    (141,728
    )Balance as of September 30, 2003
    
    $
    1,080,311
    
    
    $
    683,839
    
    
    $
    
    
    
    $
    1,764,150


Goodwill activity for the three months ended September 30, 2003 was primarily
the classification of assets held for sale as a result of the announced sale
of the majority of our federal government business (see Note 4 for further
discussion of this transaction).

The following information relates to our intangibles (in thousands):

September 30, 2003
    
    
    
    
    
    June 30, 2003Gross Carrying
    
    Accumulated
    
    
    
    
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    
    
    
    
    Amount
    
    AmortizationAmortized intangible assets:Acquired customer-related intangibles
    
    $
    151,772
    
    
    $
    (34,495
    )
    
    
    
    
    
    $
    154,771
    
    
    $
    (31,735
    )Customer-related intangibles
    
    
    130,519
    
    
    
    (44,554
    )
    
    
    
    
    
    
    139,667
    
    
    
    (50,129
    )All other
    
    
    3,107
    
    
    
    (1,501
    )
    
    
    
    
    
    
    4,031
    
    
    
    (2,314
    )Total
    
    $
    285,398
    
    
    $
    (80,550
    )
    
    
    
    
    
    $
    298,469
    
    
    $
    (84,178
    )Unamortized intangible asset:Title plant
    
    $
    50,800
    
    
    
    
    
    
    
    
    
    
    $
    50,800


Aggregate amortization:For the quarter ended September 30, 2003
    
    $
    9,864For the quarter ended September 30, 2002
    
    
    8,786Estimated amortization:For the year ended June 30, 2004
    
    $
    37,353For the year ended June 30, 2005
    
    
    33,744For the year ended June 30, 2006
    
    
    28,891For the year ended June 30, 2007
    
    
    24,483For the year ended June 30, 2008
    
    
    21,114


Amortization includes amounts charged to amortization expense for
customer-related intangibles and other intangibles, other than contract
inducements. Amortization of contract inducements of $2.6 million and $1.2
million for the three months ended September 30, 2003 and 2002, respectively,
is recorded as a reduction of related contract revenue. Amortization expense
includes approximately $4.2 million and $4.0 million for acquired
customer-related intangibles for the three months ended September 30, 2003
and 2002, respectively. 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 also equates to a
weighted average of 8 years.

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



|6. |  | COMPREHENSIVE INCOME
|-- |  | --------------------

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), establishes standards for reporting and display of
comprehensive income and its components in financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. Comprehensive income is the total
of net income and all other non-owner changes within a companys equity.

The components of comprehensive income are as follows (in thousands):

Three months ended September 30,2003
    
    2002Net income
    
    $
    86,808
    
    
    $
    69,456Other comprehensive income (loss):Foreign currency translation adjustment
(net of tax effect of ($723))
    
    
    (1,205
    )
    
    
    Comprehensive income
    
    $
    85,603
    
    
    $
    69,456




|7. |  | 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 EndedSeptember 30,2003
    
    2002Numerator:Numerator for basic earnings per share -
Income available to common stockholders
    
    $
    86,808
    
    
    $
    69,456Effect of dilutive securities:Interest on 3.5% convertible debt, net of tax
    
    
    2,054
    
    
    
    2,054Numerator for diluted earnings per share -
Income available to common stockholders
    
    $
    88,862
    
    
    $
    71,510Denominator:Weighted average basic shares outstanding
    
    
    133,235
    
    
    
    132,073Effect of dilutive securities:3.5% convertible debt
    
    
    7,298
    
    
    
    7,298Stock options
    
    
    3,427
    
    
    
    3,613Total potential common shares
    
    
    10,725
    
    
    
    10,911Denominator for weighted average diluted shares
    
    
    143,960
    
    
    
    142,984Earnings per common share (basic)
    
    $
    0.65
    
    
    $
    0.53Earnings per common share assuming dilution
    
    $
    0.62
    
    
    $
    0.50


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



|8. |  | 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. The following is a summary of certain
financial information by reportable segment (in thousands):

State and Local
    
    
    
    
    
    FederalGovernment
    
    Commercial
    
    Government
    
    Corporate
    
    ConsolidatedThree Months Ended September 30, 2003Revenues
    
    $
    477,044
    
    
    $
    339,852
    
    
    $
    219,739
    
    
    $
    
    
    
    $
    1,036,635Operating expenses
    
    
    379,337
    
    
    
    262,749
    
    
    
    196,310
    
    
    
    12,899
    
    
    
    851,295Adjusted EBITDA (a)
    
    
    97,707
    
    
    
    77,103
    
    
    
    23,429
    
    
    
    (12,899
    )
    
    
    185,340Depreciation and amortization expense
    
    
    16,310
    
    
    
    22,449
    
    
    
    2,081
    
    
    
    571
    
    
    
    41,411Operating income
    
    $
    81,397
    
    
    $
    54,654
    
    
    $
    21,348
    
    
    $
    (13,470
    )
    
    $
    143,929Three Months Ended September 30, 2002Revenues
    
    $
    387,382
    
    
    $
    287,528
    
    
    $
    207,671
    
    
    $
    
    
    
    $
    882,581Operating expenses
    
    
    309,679
    
    
    
    219,715
    
    
    
    186,909
    
    
    
    10,481
    
    
    
    726,784Adjusted EBITDA (a)
    
    
    77,703
    
    
    
    67,813
    
    
    
    20,762
    
    
    
    (10,481
    )
    
    
    155,797Depreciation and amortization expense
    
    
    11,921
    
    
    
    18,600
    
    
    
    5,017
    
    
    
    604
    
    
    
    36,142Operating income
    
    $
    65,782
    
    
    $
    49,213
    
    
    $
    15,745
    
    
    $
    (11,085
    )
    
    $
    119,655




| | (a) |  | Adjusted EBITDA is earnings before interest expense, income taxes,
depreciation and amortization, and additionally excludes other net
non-operating expenses. We use Adjusted EBITDA, together with operating
income, as a measure of segment and consolidated performance. We
believe the exclusion of depreciation and amortization charges and net
non-operating expense provides a meaningful measure of operating
performance, and consistently excludes only these items in the
calculation of Adjusted EBITDA. We believe that net income is the most
directly comparable financial measure calculated in accordance with
GAAP, therefore, we have reconciled Adjusted EBITDA to net income. We
do not use Adjusted EBITDA as a measure of liquidity. Adjusted EBITDA
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
or as an indicator of our performance or to cash flows from operating
activities as a measure of liquidity. Our measure of Adjusted EBITDA
may not be comparable to similarly titled measures of other companies.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following reconciles consolidated Adjusted EBITDA to consolidated net
income (in thousands):

Three Months EndedSeptember 30,2003
    
    2002Adjusted EBITDA
    
    $
    185,340
    
    
    $
    155,797Depreciation and amortization
    
    
    41,411
    
    
    
    36,142Operating income
    
    
    143,929
    
    
    
    119,655Interest expense
    
    
    5,220
    
    
    
    7,054Other non-operating expense (income), net
    
    
    (180
    )
    
    
    1,472Income tax expense
    
    
    52,081
    
    
    
    41,673Net income
    
    $
    86,808
    
    
    $
    69,456


8



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##### Table of Contents



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



|9. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------

Our Education Services business, which is included in our commercial segment,
performs third party student loan servicing in the Federal Family Education
Loan program (FFEL) on behalf of various financial institutions. At
September 30, 2003, we serviced a FFEL portfolio of 1.4 million loans with an
outstanding principal balance of more than $15.7 billion. Some servicing
agreements contain provisions that, under certain circumstances, require us
to purchase the loans from the investor if the loan guaranty has been
permanently terminated as a result of a loan default caused by our servicing
error. If defaults caused by us are cured during an initial period, any
obligation we may have to purchase these loans expires. Loans that we
purchase may be subsequently cured; the guaranty reinstated and we repackage
the loans for sale to third parties. We evaluate the collectibility of any
purchased loans and establish a reserve for potential losses, or default
liability reserve, through a charge to the provision for loss on defaulted
loans purchased. The reserve is evaluated periodically and adjusted based
upon managements analysis of the historical performance of the purchased
loans. This reserve was approximately $4.4 million at September 30, 2003.

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. On June 19, 2003,
the Texas Supreme Court requested that the parties file briefs on the merits
of the appeal. The parties have completed the briefing to the Texas Supreme
Court and are awaiting a notice of hearing or a decision from the 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.

One of our subsidiaries, ACS Defense, Inc., and several 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 1990s 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. We
are conducting an ongoing internal investigation of this matter through
outside legal counsel and we are cooperating 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.

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

Another of our subsidiaries, ACS State & Local Solutions, Inc., and a teaming
partner of this subsidiary, Tier Technologies, Inc. (Tier), received a
grand jury document subpoena issued by the U.S. District Court for the
Southern District of New York in May 2003. 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 the teaming arrangement
between ACS and Tier Technologies on child support payment processing
contracts awarded to ACS and Tier Technologies, as a subcontractor to ACS, in
New York, Illinois and Ohio. Our annual revenue from these three contracts
will be approximately $70 million when the services are fully implemented,
representing approximately 1.8% of our annual revenue. Our teaming
arrangement also contemplated the California child support payment processing
request for proposals which is expected to be issued in late 2003 or early
2004; however, we have not entered into a teaming agreement with Tier for
California and do not expect that we and Tier Technologies, Inc. will team
together on a proposal in response to this request for proposals. We are
conducting an ongoing internal investigation of this matter through outside
legal counsel and we are cooperating with the Department of Justice in
producing documents in response to the subpoena.

Due to the preliminary nature of these government inquiries, it is difficult
to assess the impact, if any, of these inquiries on ACS.

In addition to the foregoing, we are subject to certain other legal
proceedings, inquiries, claims and disputes which arise in the ordinary
course of business. Although we cannot predict the outcomes of these
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.

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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 SEC. We have presented herein a reconciliation of these
measures to the most directly comparable GAAP financial measure. The
presentation of this additional information is 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 September 30, 2003, we signed contracts with new
clients and incremental business with existing clients representing $149
million of annualized recurring revenue. The commercial segment contributed 68%
of the new contract signings including a multi-year contract with Gateway, Inc.
to provide IT, human resources outsourcing and finance and accounting
outsourcing services. The state and local governments segment contributed 18%
of the new contract signings and the federal government segment contributed the
remaining 14%. We define new business signings as recurring revenue from new
contracts, including the incremental portion of renewals, signed during the
period and represents the estimated annual recurring revenues, as measured
under GAAP, to be recorded under that contract after full implementation.

In August 2003, we announced an agreement to sell the majority of our federal
government business to Lockheed Martin Corporation for approximately $658
million, which includes $70 million payable pursuant to a five-year non-compete
agreement. Revenues from the federal business to be divested were approximately
$685 million for fiscal 2003. This divestiture excludes our Department of
Education relationship, which during fiscal year 2003 had revenues of
approximately $172 million. Additionally, our commercial and state and local
government operations will continue to serve as a subcontractor on portions of
the transferred business. In addition, we will acquire Lockheed Martin
Corporations commercial information technology business, with trailing,
recurring annual revenues of approximately $240 million, for approximately $107
million. These transactions, which are subject to certain closing conditions,
are expected to be completed during the second quarter of fiscal 2004. The
expected after-tax proceeds from the divestiture will generally be used to pay
down debt, fund our share repurchase program and for general corporate
purposes.

On September 2, 2003, we announced that our Board of Directors authorized a
share repurchase program of up to $500 million of our Class A common stock
effective immediately. The program, which is open-ended, will allow us to
repurchase our shares on the open market from time to time in accordance with
SEC rules and regulations, including shares that could be purchased pursuant to
SEC Rule 10b5-1. The number of shares to be purchased and the timing of
purchases will be based on the level of cash and debt balances, general
business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources,
including, but not limited to, cash flow from operations, borrowings under our
existing revolving credit facility and, if consummated, proceeds from the sale
of the majority of our federal government business. As of September 30, 2003 we
had repurchased 700,000 shares at a total costs of approximately $35.7 million.
Through November 11, 2003, we have repurchased approximately 2.3 million shares
at a total cost of approximately $113.3 million.

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##### Table of Contents



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. The Department announced that
the competitive procurement would be conducted in two phases with phase one
being the determination of eligibility to participate and phase two being the
selection process. We, along with Sallie Mae and a third participant who
subsequently withdrew from the competition were selected as eligible to
participate. On July 7, 2003, we submitted our proposal to the Department. In
August 2003, the Department notified us that it had determined that we are in
the competitive range for award, and that negotiations would begin shortly to
be followed by the Departments request for submission of final proposal
revisions and an award determination. We submitted a final proposal to
the Department in November 2003. The Department has indicated it will make a
decision on the procurement in November 2003. Although we believe we are positioned
favorably because of our performance record with the Department, there
can be no assurance that we will be awarded the new contract for Common
Services to Borrowers.

In May 2003, the Department provided public notice that it intended to enter
into negotiations with us to modify our existing contract for the purpose of
revising the period of performance for a period of up to 36 months, with the
use of appropriate options, through September 30, 2006. The Department further
stated that this contract action would be on a sole source basis and would
accommodate a prompt and successful transition to the Common Services for
Borrowers vendor. We are continuing discussions with the Department regarding
this modification; however, the terms of the proposed modification have not
been negotiated at this time and it is likely that the negotiations will not be
completed until final award by the Department of the Common Services for
Borrowers contract.

In 2001, we were awarded a contract by the Department of Community Health of
the State of Georgia (DCH) to develop, implement and operate a system to
administer health benefits to Georgia Medicaid recipients as well as state
government employees. This system development project is large and complex and
involves development of the first system in the industry that will process both
Medicaid and state employee claims. The Medicaid phase of this project was
implemented on April 1, 2003. As with any large, complex system development and
implementation project certain delays and operational issues were encountered
in this phase. The initial phase operational issues have been substantially
addressed. We are working in collaboration with DCH and the Georgia healthcare
providers to address ongoing program issues, including the implementation of
new policy changes by DCH as well as changes required by HIPAA. We believe,
based on our analysis to date, that the savings to the State of Georgia
associated with this initial phase of the contract will exceed the savings
initially anticipated. We are also in continuing discussions with DCH regarding
claims that we and DCH have asserted against each other related to delays in
the initial phase development. Both we and DCH have agreed to resolve the
issues in a collaborative manner. Any final amount that we may agree to pay
DCH has not been negotiated; however, the cost associated with delays in system
implementation, including incremental transition costs incurred by DCH, have
been properly and fully reflected in our financial results. As of
September 30,2003, we had approximately $84.5 million of
unbilled receivables related to this contract and had $48.1 million of billed
receivables, of which $42.8 million was past due. We expect to
resolve this matter over the next several months in an amicable fashion;
however, there can be no assurance as to the ultimate outcome of this matter.

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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. We use the
calculation of internal revenue growth to measure revenue growth excluding the
impact of acquired revenues and believe these adjustments to historical
reported results are necessary to accurately reflect our internal revenue
growth. The following table sets forth the calculation of internal revenue
growth (in thousands):

Three months ended September 30,2003
    
    2002
    
    $ Growth
    
    Growth %ConsolidatedTotal Revenues
    
    $
    1,036,635
    
    
    $
    882,581
    
    
    $
    154,054
    
    
    
    17
    %Acquired revenues
    
    
    20,004
    
    
    
    
    
    
    
    20,004
    
    
    
    2
    %Internal revenues
    
    
    1,016,631
    
    
    
    882,581
    
    
    
    134,050
    
    
    
    15
    %Total
    
    $
    1,036,635
    
    
    $
    882,581
    
    
    $
    154,054
    
    
    
    17
    %State & Local GovernmentTotal Revenues
    
    $
    477,040
    
    
    $
    387,382
    
    
    $
    89,658
    
    
    
    23
    %Acquired revenues
    
    
    5,004
    
    
    
    
    
    
    
    5,004
    
    
    
    1
    %Internal revenues
    
    
    472,036
    
    
    
    387,382
    
    
    
    84,654
    
    
    
    22
    %Total
    
    $
    477,040
    
    
    $
    387,382
    
    
    $
    89,658
    
    
    
    23
    %CommercialTotal Revenues
    
    $
    339,852
    
    
    $
    287,528
    
    
    $
    52,324
    
    
    
    18
    %Acquired revenues
    
    
    15,000
    
    
    
    
    
    
    
    15,000
    
    
    
    5
    %Internal revenues
    
    
    324,852
    
    
    
    287,528
    
    
    
    37,324
    
    
    
    13
    %Total
    
    $
    339,852
    
    
    $
    287,528
    
    
    $
    52,324
    
    
    
    18
    %Federal GovernmentTotal Revenues
    
    $
    219,738
    
    
    $
    207,670
    
    
    $
    12,068
    
    
    
    6
    %Acquired revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Internal revenues
    
    
    219,738
    
    
    
    207,670
    
    
    
    12,068
    
    
    
    6
    %Total
    
    $
    219,738
    
    
    $
    207,670
    
    
    $
    12,068
    
    
    
    6
    %


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##### Table of Contents



RESULTS OF OPERATIONS

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

Three months endedSeptember 30,2003
    
    2002Revenues
    
    
    100
    %
    
    
    100
    %Expenses:Wages and benefits
    
    
    46.0
    
    
    
    45.6Services and supplies
    
    
    25.5
    
    
    
    25.6Rent, lease and maintenance
    
    
    9.3
    
    
    
    9.6Depreciation and amortization
    
    
    4.0
    
    
    
    4.1Other operating expenses
    
    
    1.3
    
    
    
    1.5Total operating expenses
    
    
    86.1
    
    
    
    86.4Operating income
    
    
    13.9
    
    
    
    13.6Interest expense
    
    
    0.5
    
    
    
    0.8Other non-operating expense, net
    
    
    0.0
    
    
    
    0.2Pretax profit
    
    
    13.4
    
    
    
    12.6Income tax expense
    
    
    5.0
    
    
    
    4.7Net income
    
    
    8.4
    %
    
    
    7.9
    %


COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2002

Revenues
In the first quarter of fiscal year 2004, our revenue increased $154.1 million,
or 17%, to $1.04 billion from $882.6 million in the first quarter of fiscal
year 2003. Internal revenue growth for the first quarter of fiscal year 2004
was 15%. The remaining revenue growth was due to acquisitions.

Revenue in our state and local government segment, which represents 46% of
consolidated revenue for the first quarter of fiscal year 2004, increased $89.7
million, or 23%, to $447.0 million in the first quarter of fiscal year 2004
compared to the same period last year. Internal revenue growth of 22% resulted
from the ramp up of revenue on our Georgia and Texas Medicaid contracts and our
New Jersey EZPass contract.

Revenue in our commercial segment, which represents 33% of consolidated revenue
for the first quarter of fiscal year 2004, increased $52.3 million, or 18%, to
$339.9 million in the first quarter of fiscal year 2004 compared to the same
period last year. Internal revenue growth of 13% resulted primarily from the
ramp of new business, including the Motorola and Ingram Micro contracts signed
in fiscal year 2003.

Revenue in our federal government segment, which represents 21% of consolidated
revenue for the first quarter of fiscal year 2004, increased $12.1 million, or
6%, to $219.7 million in the first quarter of fiscal year 2004 compared to the
same period last year as a result of increased revenues with Department of
Defense agencies.

Operating Expenses
As a percentage of revenue, our operating expenses decreased 0.3% to 86.1% in
the first quarter of fiscal year 2004 from 86.4% in the first quarter of fiscal
year 2003. Our operating expenses increased $129.8 million, or 17.0% to $892.7
million in the first quarter of fiscal year 2004 from $762.9 million in the
first quarter of fiscal 2003. During the first quarter of fiscal year 2004, we
suspended depreciation and amortization of the assets related to our federal
government business that were classified as held for sale during the quarter of
approximately $4.3 million ($2.7 million, net of tax). This increase was
offset by higher incentive compensation expense recorded in the fiscal year
2004 quarter.

Wages and benefits increased $74.2 million, or 18.4%, to $477.1 million. As a
percentage of revenue, wages and benefits increased 0.4% to 46%, primarily due
to higher incentive compensation expense recorded in the first quarter of
fiscal 2004.

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Services and supplies increased $38.5 million, or 17.0%, to $265.0 million. As
a percentage of revenue, services and supplies decreased 0.1% to 25.5%,
primarily due to costs associated with the pursuit of a potential outsourcing
transaction recorded in the first quarter of fiscal year 2003.

Rent, lease and maintenance increased $11.6 million, or 13.7%, to $95.9
million. As a percentage of revenue, rent, lease and maintenance decreased
0.3% to 9.3% due to increased BPO services in our revenue mix, which has a
lower component of rent, lease and maintenance than traditional IT outsourcing
and systems integration.

Depreciation and amortization increased $5.3 million, or 14.6%, to $41.4
million. As a percentage of revenue, depreciation and amortization decreased
0.1%, to 4.0% due to the cessation of $4.3 million in depreciation and
amortization expense related to the assets held for sale in our federal
government business. This decrease was partially offset by increased
depreciation and amortization primarily due to capital expenditures to support
new business.

Other operating expenses increased $0.2 million, or 1.8%, to $13.3 million. As
a percentage of revenue, other operating expenses decreased 0.2% to 1.3%
primarily due to costs associated with the pursuit of a potential outsourcing
transaction recorded in the first quarter of fiscal year 2003.

Operating Margins
Our operating margins increased 0.3%, to 13.9% in the first quarter of fiscal
year 2004 from 13.6% for the same period last year primarily due to the
cessation of $4.3 million in depreciation and amortization expense related to
the assets held for sale in our federal government business offset by higher
incentive compensation expense recorded in the first quarter of fiscal year
2004.

Interest expense
Interest expense decreased $1.8 million in the first quarter of fiscal year
2004 compared to the first quarter of fiscal year 2003, primarily as a result
of lower outstanding debt during the fiscal year 2004 quarter.

Other non-operating expense (income), net
Other non-operating expense (income), net decreased $1.7 million in the first
quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003.
The first quarter of fiscal year 2003 included $1.4 million of writedowns of
long-term assets.

Tax Expense
Our effective tax rate of approximately 37.5% in fiscal year 2004 exceeds the
federal statutory rate of 35% due primarily to the net effect of state income
taxes.

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 three months ended September 30, 2003, we generated approximately
$59.4 million in cash flow from operations versus approximately $86.9 million
in the same period in fiscal year 2003. Free cash flow was approximately $16.6
million for the first three months of fiscal year 2004 versus approximately
$42.1 million for the first three months of fiscal year 2003, a decrease of 61%
due to decreased accounts receivable collections and increased annual incentive
compensation payments compared to the prior year. Free cash flow is measured as
operating cash flows (net cash provided by operating activities, as reported in
our consolidated statements of cash flows), less capital expenditures
(purchases of property, equipment and software, net of sales, as reported in
our consolidated statements of cash flows). The following table sets forth the
calculations of free cash flow (in thousands):

Three months endedSeptember 30,2003
    
    2002Net cash provided by operating activities
    
    $
    59,382
    
    
    $
    86,881Purchases of property, equipment and software, net
    
    
    (42,760
    )
    
    
    (44,788
    )Free cash flow
    
    $
    16,622
    
    
    $
    42,093


During the three months ended September 30, 2003, we used $50.8 million for
investing activities. This includes $42.8 million in the first quarter of
fiscal year 2004 related to the purchase of property, equipment and software
versus $44.8 million in the same period in fiscal year 2003. Our capital
expenditures declined approximately 4.1% of total revenues for the three months
ended September 30, 2003 compared to 5.1% in the same period in fiscal year
2003, primarily as a result of the timing of capital expenditures related to
new business signings.

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During the first three months of fiscal year 2004, cash used by financing
activities was $23.4 million. During the first three months of fiscal year
2004, we used $35.7 million to repurchase 700,000 shares of our common stock
pursuant to our share repurchase program. We had net borrowings of $9.3
million on our $875 million credit facility during the quarter.

As of September 30, 2003, we had approximately $509.4 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
$187.0 million outstanding under our $875.0 million credit facility. At
September 30, 2003, we had approximately $510.6 million available on our $875.0
million revolving credit facility after considering outstanding letters of
credit of $177.4 million that secure certain contractual performance and other
obligations.

We have certain contracts, primarily in our state and local business that
require us to provide a surety bond or a letter of credit as a guarantee of
performance. As of September 30, 2003, outstanding surety bonds of $311.3
million and $170.9 million of our outstanding letters of credit secure our
performance of contractual obligations with our clients. In general, we would
only be liable for the amount of these guarantees in the event of default in
the performance of our obligations under each contract, the probability of
which we believe is remote. We believe that we have sufficient capacity in the
surety markets and liquidity from our cash flow and revolving credit facility
to meet ongoing business needs and to respond to future requests for proposals
from state and local governments.

At September 30, 2003, we had cash and cash equivalents of $36.4 million
compared to $51.2 million at June 30, 2003. Our working capital (defined as
current assets of $1.2 billion less current liabilities of $559.9 million)
increased $257.4 million to $679.4 million at September 30, 2003 from $422.0
million at June 30, 2003, which included the impact of the classification of
the assets and related liabilities of our federal government business as held
for sale (see Note 4). Our current ratio (defined as total current assets of
$1.2 billion million divided by total current liabilities of $559.9 million)
was 2.2 and 1.8 at September 30, 2003 and June 30, 2003, respectively. 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 17.0%
at September 30, 2003 and June 30, 2003.

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 SEPTEMBER 30, 2003 (IN THOUSANDS):

Payments Due by PeriodLess thanContractual Obligations
    

Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    503,990
    
    
    $
    
    
    
    $
    503,990
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    5,405
    
    
    
    2,197
    
    
    
    2,219
    
    
    
    989
    
    
    
    Operating leases
    
    
    337,722
    
    
    
    99,102
    
    
    
    126,993
    
    
    
    60,973
    
    
    
    50,654Purchase obligations
    
    
    50,000
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    25,000Total Contractual Cash Obligations
    
    $
    897,117
    
    
    $
    106,299
    
    
    $
    643,202
    
    
    $
    71,962
    
    
    $
    75,654


Amount of Commitment Expiration per PeriodTotal Amounts
    
    Less thanOther Commercial Commitments
    
    Committed
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsStandby letters of credit
    
    $
    177,379
    
    
    $
    177,379
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety Bonds
    
    
    311,272
    
    
    
    293,535
    
    
    
    17,700
    
    
    
    37
    
    
    
    Total Commercial Commitments
    
    $
    488,651
    
    
    $
    470,914
    
    
    $
    17,700
    
    
    $
    37
    
    
    $
    


During the first quarter of fiscal year 2004, we entered into an agreement with
a customer to purchase $50 million of products and services over
a seven-year
term, with a minimum purchase of $5 million annually, at prices consistent with
the customers commercial pricing and discount guidelines.

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We are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
September 30, 2003, the maximum aggregate amount of the outstanding contingent
obligations is approximately $21.9 million. Upon satisfaction of the specified
contractual criteria, a corresponding increase in goodwill would be recorded.
During the first quarter of fiscal year 2004, we paid $1.0 million related to
these obligations.

Our Education Services business, which is included in our commercial segment,
performs third party student loan servicing in the Federal Family Education
Loan program (FFEL) on behalf of various financial institutions. At
September 30, 2003, we serviced a FFEL portfolio of 1.4 million loans with an
outstanding principal balance of more than $15.7 billion. Some servicing
agreements contain provisions that, under certain circumstances, require us to
purchase the loans from the investor if the loan guaranty has been permanently
terminated as a result of a loan default caused by our servicing error. If
defaults caused by us are cured during an initial period, any obligation we may
have to purchase these loans expires. Loans that we purchase may be
subsequently cured; the guaranty reinstated and we repackage the loans for sale
to third parties. We evaluate the collectibility of any purchased loans and
establish a reserve for potential losses, or default liability reserve, through
a charge to the provision for loss on defaulted loans purchased. The reserve is
evaluated periodically and adjusted based upon managements analysis of the
historical performance of the purchased loans. This reserve was approximately
$4.4 million at September 30, 2003.

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 SEC 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.

Approximately 60% of our revenue is recognized based on transaction volumes,
approximately 12% is related to time and material contracts, approximately 14%
is related to cost reimbursable contracts, approximately 7% of our revenues are
recognized using percentage-of-completion accounting and the remainder is fixed
fee based.

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 recognized as services are rendered, generally
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 development and implementation services that are provided during
the period compared with the total estimated development and implementation
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

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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 Emerging Issues Task Force 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 contract elements 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 are applicable on a prospective basis to transactions entered into
in fiscal years beginning after June 15, 2003. We believe that EITF 00-21 did
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 primarily a
services company, our business acquisitions typically result in significant
amounts of goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible expense we could incur as a
result of an impairment. The determination of the value of goodwill and other
intangibles requires us to make estimates and assumptions about future business
trends and growth. We continually evaluate whether events and circumstances
have occurred that indicate the balance of goodwill or intangible assets may
not be recoverable. In evaluating impairment, we estimate the sum of expected
future cash flows derived from the goodwill or intangible asset. Such
evaluation is significantly impacted by estimates and assumptions of future
revenues, costs and expenses and other factors. 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 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.

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, cash flow 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 revenues, 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.

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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.

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.

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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, which could have a material effect on
our profitability and cash flow. 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. If we are unsuccessful in the defense of
an infringement claim and our vendors require us to initiate any of the above
actions, then such actions could have a material adverse effect on our
business, financial condition, results of operations and cash flow.

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. On October 15, 2003, regulations related
to the standardization of information used in processing healthcare
transactions took effect, and on or prior to that date, we took measures to
comply with such regulations. Other regulations have been published under HIPAA
(such as 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 first quarter of fiscal year 2004, it is unclear what impact, if
any, these deficits may have on our future business, revenues, results of
operations and cash flow.

International risks. Recently we have expanded our international operations.
International operations are subject to a number of risks including, but not
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 our 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, Asia 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 and qualified subcontractors. Our success depends to a significant
extent upon our ability to attract, retain and motivate highly skilled and
qualified personnel and to subcontract with qualified, competent
subcontractors. If we fail to attract, train, and retain, sufficient numbers
of these technically-skilled people or are unable to contract with qualified,
competent subcontractors, 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 and on qualified, competent subcontractors. The loss of any key employee
or the loss of a key subcontract relationship could have an adverse effect on
our business, financial condition, cash flow and results of operations and
prospects.

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Servicing Risks. We service (for various lenders and under various service
agreements) a portfolio of over $15 billion of loans made under the Federal
Family Loan Education Loan Program, which loans are guaranteed by a federal
government agency. If a loan is in default, then a claim is made upon the
guarantor. If the guarantor denies the claim because of a servicing error,
then under certain of the servicing agreements we may be required to purchase
the loan from the lender. Upon purchase of the loan, we attempt to cure the
servicing errors and either sell the loan back to the guarantor (which must
occur within a specified period of time) or sell the loan on the open market to
a third party. We are subject to the risk that we may be unable to cure the
servicing errors or sell the loan on the open market. Our reserves, which are
based on historical information, may be inadequate if our servicing performance
results in the requirement that we repurchase a substantial number of loans,
which repurchase could have a material adverse impact on our cash flow and
profitability.

Disruption in Utility or Network Services. Our services are dependent on the
companies providing electricity and other utilities to our operating
facilities, as well as network companies providing connectivity to our
facilities and clients. While there are backup systems in many of our
operating facilities, an extended outage of utility services may have a
material adverse effect on our operations, revenues, cash flow and
profitability.

Indemnification Risk. Our contracts, including our agreements with respect to
divestitures, include various indemnification obligations. If we are required
to satisfy an indemnification obligation, that may have a material adverse
effect on our business, profitability and cash flow.

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, cash flow or profitability.







ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have fixed rate and variable rate debt instruments. Our variable rate debt
instruments are subject to market risk from changes in interest rates.
Sensitivity analysis is one technique used to measure the impact of changes in
the interest rates on the value of market-risk sensitive financial instruments.
A hypothetical 10% movement in interest rates would not have a material impact
on our future earnings, fair value, or cash flows.







ITEM 4. CONTROLS AND PROCEDURES

The management of the Company, including the Companys principal executive
officer and principal financial officer have evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934) as of September 30, 2003. Based on such
evaluation, the Companys principal executive officer and principal financial
officer have concluded that as of September 30, 2003, such disclosure controls
and procedures are effective for the purpose of ensuring that material
information required to be in this Quarterly Report is made known to them by
others on a timely basis. There have not been any changes in the Companys
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f) of the Securities Exchange Act of 1934) during the quarter ended
September 30, 2003 that have materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting.

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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. On June 19, 2003, the Texas
Supreme Court requested that the parties file briefs on the merits of the
appeal. The parties have completed the briefing to the Texas Supreme Court and
are awaiting a notice of hearing or a decision from the 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.

One of our subsidiaries, ACS Defense, Inc., and several 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 1990s 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. We are conducting an
ongoing internal investigation of this matter through outside legal counsel and
we are cooperating 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.

Another of our subsidiaries, ACS State & Local Solutions, Inc., and a teaming
partner of this subsidiary, Tier Technologies, Inc., received a grand jury
document subpoena issued by the U.S. District Court for the Southern District
of New York in May 2003. 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 the teaming arrangement between ACS and Tier Technologies
on child support payment processing contracts awarded to ACS and Tier
Technologies, as a subcontractor to ACS, in New York, Illinois and Ohio. Our
annual revenue from these three contracts will be approximately $70 million
when the services are fully implemented, representing approximately 1.8% of our
annual revenue. Our teaming arrangement also contemplated the California child
support payment processing request for proposals which is expected to be issued
in late 2003 or early 2004; however, we have not entered into a teaming
agreement with Tier for California and do not expect that we and Tier
Technologies, Inc. will team together on a proposal in response to this request
for proposals. We are conducting an ongoing internal investigation of this
matter through outside legal counsel and we are cooperating with the Department
of Justice in producing documents in response to the subpoena.

Due to the preliminary nature of these government inquiries, it is difficult to
assess the impact, if any, of these inquiries on ACS.

In addition to the foregoing, we are subject to certain other legal
proceedings, inquiries, claims and disputes which arise in the ordinary course
of business. Although we cannot predict the outcomes of these 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.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

At our 2003 Annual Meeting of Stockholders held on October 30, 2003, the
following actions were taken:



|1. |  | The following Directors were elected for terms of office expiring in
2004:
|-- |  | --------------------------------------------------------------------------

Name
    
    For
    
    WithheldDarwin Deason
    
    
    171,732,385
    
    
    
    2,839,678Jeffrey A. Rich
    
    
    172,054,451
    
    
    
    2,517,612Mark A. King
    
    
    172,054,451
    
    
    
    2,517,612Joseph P. ONeill
    
    
    168,733,292
    
    
    
    5,838,771Frank A. Rossi
    
    
    168,733,292
    
    
    
    5,838,771J. Livingston Kosberg
    
    
    172,075,112
    
    
    
    2,496,951Dennis McCuistion
    
    
    172,106,663
    
    
    
    2,465,400


Pursuant to the terms of our Notice of Annual Meeting and Proxy Statement,
proxies received were voted, unless authority was withheld, in favor of the
election of the seven nominees named.



|2. |  | A proposal by the Board of Directors to approve Performance Based
Incentive Compensation for our executive officers was approved by the
stockholders. The stockholders cast 158,210,358 votes in favor of this
proposal and 2,159,140 votes were cast against this proposal. There were
375,633 abstentions and 13,826,932 broker non-votes.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | A proposal by the Board of Directors to ratify the appointment of
PricewaterhouseCoopers LLP as our independent auditors for fiscal year 2004
was approved by the stockholders. The stockholders cast 168,530,710 votes
in favor of the proposal and 5,950,302 votes against the proposal. There
were 118,051 abstentions.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



| |  | Reference is made to the Index to Exhibits beginning on page 25 for a list of all exhibits filed as part of this report.
| |  | ------------------------------------------------------------------------------------------------------------------------



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



| | 1. |  | On July 29, 2003, the Company filed a Current Report on Form
8-K (dated as of July 29, 2003) for the purpose of furnishing the
earnings press release, announcing the telephone conference and
webcast to disclose the Companys financial results and disclosing
the location of the Companys Supplementary Financial Information
used during the conference for the year ended June 30, 2003.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | On July 31, 2003, the Company filed a Current Report on Form
8-K (dated as of July 29, 2003) for the purpose of the furnishing
the transcript of the Companys presentation during the telephone
conference disclosing the Companys financial results, the questions
and answers following the presentation and furnishing a copy of the
slides presented during the call on the Companys website.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | On August 1, 2003, the Company filed a Current Report on Form
8-K (dated as of August 1, 2003) for the purpose of furnishing a
copy of the press release announcing the signing of a definitive
agreement to sell a significant portion of its federal government
business to Lockheed Martin Corporation and the signing of a
definitive agreement to acquire the commercial information
technology business of Lockheed Martin, and furnishing a copy of the
slides presented on the Companys website during the conference call
on August 1, 2003.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | On September 2, 2003 the Company filed a Current Report on
Form 8-K (dated as of September 2, 2003) for the purposes of
furnishing the press release announcing that its Board of Directors
had authorized a share repurchase program for the purchase of up to
$500 million of its outstanding shares of Class A common stock.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | On September 15, 2003, the Company filed a Current Report on
Form 8-K (dated as of September 11, 2003) for the purpose of
furnishing the press release announcing the appointment of new
directors and changes to the corporate governance policies necessary
to adopt certain provisions of the Sarbanes-Oxley Act of 2002 and
the proposed New York Stock Exchange listing standards.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 14th day of November, 2003.

AFFILIATED COMPUTER SERVICES, INC.By:
    
    /s/ Warren D. EdwardsWarren D. EdwardsExecutive Vice President andChief Financial Officer


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INDEX TO EXHIBITS

Exhibit Number
    
    Exhibit Name3.1
    
    Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to our Registration Statement on Form S-3,
filed March 30, 2001, File No. 333-58038 and incorporated
herein by reference)3.2
    
    Certificate Of Correction to Certificate of Amendment of
the Company, dated August 30, 2001 (filed as Exhibit 3.2 to
our Annual Report on Form 10-K, filed September 17, 2003
and incorporated herein by reference)3.3
    
    Bylaws of the Company, as amended and in effect on August
13, 2002 (filed as Exhibit 3.3 to our Annual Report on Form
10-K, filed September 17, 2003 and incorporated herein by
reference)4.1
    
    Form of New Class A Common Stock Certificate (filed as
Exhibit 4.3 to our Registration Statement on Form S-1,
filed May 26, 1994, File No. 33-79394 and incorporated
herein by reference)4.2
    
    Amended and Restated Rights Agreement, dated April 2, 1999,
between the Company and First City Transfer Company, as
Rights Agent (filed as Exhibit 4.1 to our Current Report on
Form 8-K, filed May 19, 1999 and incorporated herein by
reference)4.3
    
    Indenture, dated as of February 21, 2001, between the
Company, as Issuer, and U.S. Trust Company of Texas, N.A.,
as Trustee, relating to the Companys 3.5% Convertible
Subordinated Notes due February 15, 2006 (filed as Exhibit
4.1 to our Registration Statement on Form S-3, filed March
30, 2001, File No. 333-58038 and incorporated herein by
reference)4.4
    
    Registration Rights Agreement, dated February 21, 2001, by
and between the Company and Goldman, Sachs & Co., as
representative of the several purchasers named therein
relating to the Companys 3.5% Convertible Subordinated
Notes due February 15, 2006 (filed as Exhibit 4.4 to our
Registration Statement on Form S-3, filed March 30, 2001,
File No. 333-58038 and incorporated herein by reference)4.5
    
    Specimen Note for the Companys 3.5% Convertible
Subordinated Notes due February 15, 2006 (filed as Exhibit
4.2 to our Registration Statement on Form S-3, filed March
30, 2001, File No. 333-58038 and incorporated herein by
reference)4.6
    
    Amendment No. 1 to First Amended and Restated Rights
Agreement, dated as of February 5, 2002, by and between the
Company and First City Transfer Company (filed as Exhibit
4.1 to our Current Report on Form 8-K, filed February 6,
2002 and incorporated herein by reference)4.7
    
    Form of Rights Certificate (included as Exhibit A to the
Amended and Restated Rights Agreement (Exhibit 4.2))10.1*
    
    Stock Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Corporation and the Company.10.2*
    
    Asset Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Service, Inc. and the Company.31.1*
    
    Certification of Chief Executive Officer31.2*
    
    Certification of Chief Financial Officer


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Exhibit Number
    
    Exhibit Name32.1*
    
    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.32.2*
    
    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.


* Filed herewith

26