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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, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the period from __________ to __________ Commission file number 001-12665 AFFILIATED COMPUTER SERVICES, INC. 
  Delaware
    
    51-0310342(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 2828 North Haskell, Dallas, Texas
    
    75204(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (214) 841-6111 Not Applicable 
  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
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[X]            No
[   ] Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date. Number of sharesoutstanding as ofTitle of each class
    
    November 3, 2004Class A Common Stock, $.01 par value
    
    
    121,943,144Class B Common Stock, $.01 par value
    
    
    6,599,372128,542,516




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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, 2004 and
June 30, 2004
    
    1Consolidated Statements of Income for the Three Months
Ended September 30, 2004 and 2003
    
    2Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2004 and 2003
    
    3Notes to Consolidated Financial Statements
    
    4  11Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    12 - 23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    23Item 4. Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    24  25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    26Item 6. Exhibits
    
    26Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)




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PART I 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 September 30,
    
    June 30,2004
    
    2004(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    59,577
    
    
    $
    76,899Accounts receivable, net
    
    
    870,049
    
    
    
    873,471Prepaid expenses and other current assets
    
    
    100,562
    
    
    
    94,054Total current assets
    
    
    1,030,188
    
    
    
    1,044,424Property, equipment and software, net
    
    
    557,745
    
    
    
    521,772Goodwill
    
    
    2,023,048
    
    
    
    1,969,326Other intangibles, net
    
    
    291,051
    
    
    
    283,767Other assets
    
    
    82,826
    
    
    
    87,953Total assets
    
    $
    3,984,858
    
    
    $
    3,907,242LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    44,354
    
    
    $
    61,749Accrued compensation and benefits
    
    
    96,568
    
    
    
    133,530Other accrued liabilities
    
    
    335,093
    
    
    
    342,648Income taxes payable
    
    
    26,962
    
    
    
    10,628Deferred taxes
    
    
    33,414
    
    
    
    25,426Current portion of long-term debt
    
    
    6,075
    
    
    
    2,048Current portion of unearned revenue
    
    
    51,840
    
    
    
    61,541Total current liabilities
    
    
    594,306
    
    
    
    637,570Long-term debt
    
    
    366,290
    
    
    
    372,439Deferred taxes
    
    
    227,293
    
    
    
    234,183Other long-term liabilities
    
    
    83,906
    
    
    
    72,563Total liabilities
    
    
    1,271,795
    
    
    
    1,316,755Commitments and contingencies (See Note 9)Stockholders equity:Class A common stock
    
    
    1,367
    
    
    
    1,360Class B common stock
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,752,661
    
    
    
    1,730,783Accumulated other comprehensive loss, net
    
    
    (2,602
    )
    
    
    (3,381
    )Retained earnings
    
    
    1,694,409
    
    
    
    1,600,252Treasury stock at cost, 14,788 and 14,900 shares, respectively
    
    
    (732,838
    )
    
    
    (738,593
    )Total stockholders equity
    
    
    2,713,063
    
    
    
    2,590,487Total liabilities and stockholders equity
    
    $
    3,984,858
    
    
    $
    3,907,242
 The accompanying notes are an integral part of these consolidated financial statements. 1




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 (in thousands, except per share amounts)
 Three Months EndedSeptember 30,2004
    
    2003Revenues
    
    $
    1,046,182
    
    
    $
    1,036,635Expenses:Wages and benefits
    
    
    431,848
    
    
    
    477,112Services and supplies
    
    
    275,062
    
    
    
    264,964Rent, lease and maintenance
    
    
    118,993
    
    
    
    95,930Depreciation and amortization
    
    
    54,319
    
    
    
    41,411Other operating expenses
    
    
    10,919
    
    
    
    13,289Total operating expenses
    
    
    891,141
    
    
    
    892,706Operating income
    
    
    155,041
    
    
    
    143,929Interest expense
    
    
    3,955
    
    
    
    5,220Other non-operating expense (income), net
    
    
    434
    
    
    
    (180
    )Pretax profit
    
    
    150,652
    
    
    
    138,889Income tax expense
    
    
    56,495
    
    
    
    52,081Net income
    
    $
    94,157
    
    
    $
    86,808Earnings per share:Basic
    
    $
    0.74
    
    
    $
    0.65Diluted
    
    $
    0.72
    
    
    $
    0.62Shares used in computing earnings per share:Basic
    
    
    127,948
    
    
    
    133,235Diluted
    
    
    131,070
    
    
    
    143,960
 The accompanying notes are an integral part of these consolidated financial statements. 2




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (in thousands)
 Three Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    94,157
    
    
    $
    86,808Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    54,319
    
    
    
    41,411Tax benefit on stock options
    
    
    9,402
    
    
    
    2,688Deferred income tax expense
    
    
    27,796
    
    
    
    21,671Other non-cash activities
    
    
    3,973
    
    
    
    4,099Changes in assets and liabilities, net of effects from acquisitions:(Increase) decrease in accounts receivable
    
    
    10,235
    
    
    
    (72,994
    )Increase in prepaid expenses and other current assets
    
    
    (6,683
    )
    
    
    (6,482
    )(Increase) decrease in other assets
    
    
    3,757
    
    
    
    (2,213
    )Decrease in accounts payable
    
    
    (20,897
    )
    
    
    (7,442
    )Decrease in accrued compensation and benefits
    
    
    (46,958
    )
    
    
    (26,628
    )Increase (decrease) in other accrued liabilities
    
    
    (19,878
    )
    
    
    7,113Increase in income taxes payable
    
    
    15,780
    
    
    
    14,578Decrease in unearned revenue
    
    
    (10,430
    )
    
    
    (7,782
    )Increase in other long-term liabilities
    
    
    4,550
    
    
    
    4,555Total adjustments
    
    
    24,966
    
    
    
    (27,426
    )Net cash provided by operating activities
    
    
    119,123
    
    
    
    59,382Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (61,587
    )
    
    
    (42,760
    )Payments for acquisitions, net of cash acquired
    
    
    (70,705
    )
    
    
    (1,037
    )Proceeds from divestitures, net of transaction costs
    
    
    (8
    )
    
    
    (838
    )Additions to other intangible assets
    
    
    (9,360
    )
    
    
    (7,531
    )Purchases of investments
    
    
    (4,541
    )
    
    
    Additions to notes receivable
    
    
    (1,076
    )
    
    
    (335
    )Proceeds received on notes receivable
    
    
    2,419
    
    
    
    1,719Other
    
    
    
    
    
    
    23Net cash used in investing activities
    
    
    (144,858
    )
    
    
    (50,759
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    404,980
    
    
    
    256,155Repayments of long-term debt
    
    
    (415,643
    )
    
    
    (246,842
    )Purchase of treasury shares
    
    
    
    
    
    
    (35,658
    )Proceeds from issuance of treasury shares
    
    
    6,036
    
    
    
    Proceeds from stock options exercised
    
    
    13,040
    
    
    
    3,778Other
    
    
    
    
    
    






    (813
    )Net cash provided by (used in) financing activities
    
    
    8,413
    
    
    
    (23,380
    )Net decrease in cash and cash equivalents
    
    
    (17,322
    )
    
    
    (14,757
    )Cash and cash equivalents at beginning of period
    
    
    76,899
    
    
    
    51,170Cash and cash equivalents at end of period
    
    $
    59,577
    
    
    $
    36,413
 The accompanying notes are an integral part of these consolidated financial statements. 3




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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 and S&P 500 company with more than 43,000
people providing business process and technology outsourcing solutions to
commercial and government clients.  The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 2004. 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, 2004. 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 the current market price 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 30,2004
    
    2003Net IncomeAs reported
    
    $
    94,157
    
    
    $
    86,808Less: Pro forma employee compensation cost
of stock-based compensation plans, net of
income tax
    
    
    5,566
    
    
    
    4,806Pro forma
    
    $
    88,591
    
    
    $
    82,002Basic earnings per shareAs reported
    
    $
    0.74
    
    
    $
    0.65Pro forma
    
    $
    0.69
    
    
    $
    0.62Diluted earnings per shareAs reported
   
    $
    0.72
    
    
    $
    0.62Pro forma
    
    $
    0.68
    
    
    $
    0.59
 4




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  3.
    
    ACQUISITIONS  In July 2004, we acquired Heritage Information Systems, Inc. (Heritage).
Heritage provides clinical management and pharmacy cost containment solutions
to 14 state Medicaid programs, over a dozen national commercial insurers and
Blue Cross Blue Shield licensees and some of the largest employer groups in
the country. The transaction was valued at approximately $23.1 million plus
related transaction costs, excluding contingent consideration of a maximum of
$17 million based upon future financial performance, and was funded from
borrowings under our Prior Facility (defined in Note 10) and cash on hand.
The purchase price was allocated to assets acquired and liabilities assumed
based on estimated fair value as of the date of acquisition. We acquired
assets of $26.6 million and assumed liabilities of $3.5 million. We recorded
$14.3 million in goodwill, which is deductible for income tax purposes, and
intangible assets of $2.4 million. The $2.4 million of intangible assets are
attributable to customer relationships and non-compete agreements with useful
lives of five years. We believe this acquisition enhances our clinical
management and cost containment service offerings. The operating results of
the acquired business are included in our financial statements in the
Government segment from the effective date of the acquisition, July 1, 2004.  In August 2004, we acquired BlueStar Solutions, Inc. (BlueStar), an
information technology outsourcer specializing in applications management of
packaged enterprise resource planning and messaging services. The transaction
was valued at approximately $73.5 million, plus related transaction costs.
The transaction value includes $6.4 million attributable to the 9.2% minority
interest we held in BlueStar prior to the acquisition; therefore, the net
purchase price was approximately $67.1 million. Of this amount,
approximately $52.4 million was paid to former BlueStar shareholders by
September 30, 2004 and was funded from borrowings under our Prior Facility
and cash on hand. The remaining purchase price (net of approximately $6.0
million of holdbacks) will be paid in the second quarter of fiscal year 2005.
The purchase price was allocated to assets acquired and liabilities assumed
based on estimated fair value as of the date of acquisition. We acquired
assets of $97.8 million and assumed liabilities of $30.7 million. We
recorded goodwill of $38.2 million, which is not deductible for income tax
purposes, and intangible assets of $11.6 million. The $11.6 million of
intangible assets are attributable to customer relationships with a useful
life of seven years. We believe that the acquisition of BlueStar improves
our existing information technology services with the addition of
applications management and messaging services. The operating results of the
acquired business are included in our financial statements in the Commercial
segment from the effective date of the acquisition, August 26, 2004. Our
consolidated balance sheet as of September 30, 2004 reflects the preliminary
allocation of the purchase price to the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition.
Additional analysis is being performed with regard to our ability to utilize
BlueStars pre-acquisition net operating loss carryovers in the
post-acquisition tax years. As a result, the purchase price allocated to the
initial deferred tax asset of $29.2 million, primarily related to net
operating losses acquired, may be adjusted in future periods if necessary.  These acquisitions are not considered material to our results of operations,
either individually or in the aggregate; therefore, no pro forma information
is presented.  4.
    
    EQUITY  Our Board of Directors has authorized two share repurchase programs totaling
$1.25 billion of our Class A common stock. 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 and on April 29, 2004, we announced
that our Board of Directors authorized a new, incremental share repurchase
program of up to $750 million of our Class A common stock. The programs,
which are 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 on hand, cash flow from operations, and borrowings under our Credit
Facility (defined in Note 10). As of September 30, 2004, we had repurchased approximately 15
million shares at a total cost of approximately $743.2 million. We did not
repurchase any shares in the first quarter of fiscal year 2005. As of
September 30, 2004, there remained approximately
$506.8 million authorized under our share repurchase programs. 5




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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, 2004 are as follows (in thousands): Government
    
    Commercial
    
    TotalBalance as of June 30, 2004
    
    $
    1,082,536
    
    
    $
    886,790
    
    
    $
    1,969,326Acquisition activity
    
    
    15,294
    
    
    
    38,428
    
    
    
    53,722Balance as of September 30, 2004
    
    $
    1,097,830
    
    
    $
    925,218
    
    
    $
    2,023,048
  Goodwill activity for the three months ended September 30, 2004 was primarily
due to the acquisitions of Heritage and BlueStar (see Note 3). Approximately
$1.7 billion, or 84%, of the original gross amount of goodwill
recorded is deductible for income tax purposes.  The following information relates to our other intangible assets (in
thousands): September 30, 2004
    
    June 30, 2004Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Acquired customer-related
intangibles
    
    $
    205,620
    
    
    $
    (55,748
    )
    
    $
    191,517
    
    
    $
    (49,425
    )Customer-related intangibles
    
    
    149,708
    
    
    
    (60,677
    )
    
    
    142,802
    
    
    
    (53,334
    )All other
    
    
    2,854
    
    
    
    (1,506
    )
    
    
    2,854
    
    
    
    (1,447
    )Total
    
    $
    358,182
    
    
    $
    (117,931
    )
    
    $
    337,173
    
    
    $
    (104,206
    )Unamortized intangible asset:Title plant
    
    $
    50,800
    
    
    
    
    
    
    $
    50,800
 Aggregate Amortization:For the quarter ended September 30, 2004
    
    $
    14,316For the quarter ended September 30, 2003
    
    
    9,864Estimated amortization for the years ended June 30,2005
    
    $
    49,3572006
    
    
    42,2122007
    
    
    37,3882008
    
    
    34,2632009
    
    
    28,444
  Amortization includes amounts charged to amortization expense for
customer-related intangibles and other intangibles, other than contract
inducements. Amortization of contract inducements of $3.1 million and $2.6
million for the three months ended September 30, 2004 and 2003, respectively,
is recorded as a reduction of related contract revenue. Amortization expense
includes approximately $7.9 million and $4.2 million for acquired
customer-related intangibles for the three months ended September 30, 2004
and 2003, respectively. Amortized intangible assets are amortized over the
related contract term. The amortization period of customer-related
intangible assets ranges from 1 to 11 years, with a weighted average of
approximately 8 years. The amortization period for all other intangible
assets, including trademarks, ranges from 4 to 20 years, with a weighted
average of 7 years. 6




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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 endedSeptember 30,2004
    
    2003Net income
    
    $
    94,157
    
    
    $
    86,808Other comprehensive income (loss):Foreign currency translation adjustment
(net of income tax effect of $(467) and
$723, respectively)
    
    
    779
    
    
    
    (1,205
    )Comprehensive income
    
    $
    94,936
    
    
    $
    85,603
  7.
    
    EARNINGS PER SHARE  In accordance with Statement of Financial Accounting Standard No. 128,
Earnings per Share, the following table sets forth the computation of
basic and diluted earnings per share (in thousands except per share amounts): Three Months EndedSeptember 30,2004
    
    2003Numerator:Numerator
for earnings per share (basic) - Income available to common stockholders
    
    $
    94,157
    
    
    $
    86,808Effect of dilutive securities:Interest on 3.5% convertible debt, net of income tax
    
    
    
    
    
    
    2,054Numerator
for earnings per share assuming dilution - Income available to common stockholders
    
    $
    94,157
    
    
    $
    88,862Denominator:Weighted average shares outstanding (basic)
    
    
    127,948
    
    
    
    133,235Effect of dilutive securities:3.5% convertible debt
    
    
    
    
    
    
    7,298Stock options
    
    
    3,122
    
    
    
    3,427Total potential common shares
    
    
    3,122
    
    
    
    10,725Denominator for earnings per share assuming dilution
    
    
    131,070
    
    
    
    143,960Earnings per share (basic)
    
    $
    0.74
    
    
    $
    0.65Earnings per share assuming dilution
    
    $
    0.72
    
    
    $
    0.62
 7




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  8.
    
    SEGMENT INFORMATION  During fiscal year 2004, as the result of the sale of the majority of our
Federal business, we combined our State and Local Government and Federal
segments into our Government segment. Prior period reporting has been
restated to conform to the new segment reporting.  The following is a summary of certain financial information by reportable
segment (in thousands): Government
    
    Commercial
    
    Corporate
    
    ConsolidatedThree Months Ended September 30, 2004Revenues (a)
    
    $
    551,519
    
    
    $
    494,663
    
    
    $
    
    
    
    $
    1,046,182Operating expenses (excluding
depreciation and amortization)
    
    
    439,960
    
    
    
    384,769
    
    
    
    12,093
    
    
    
    836,822Depreciation and amortization
    
    
    19,475
    
    
    
    34,328
    
    
    
    516
    
    
    
    54,319Operating income
    
    $
    92,084
    
    
    $
    75,566
    
    
    $
    (12,609
    )
    
    $
    155,041Three Months Ended September 30, 2003Revenues (a)
    
    $
    696,783
    
    
    $
    339,852
    
    
    $
    
    
    
    $
    1,036,635Operating expenses (excluding
depreciation and amortization)
    
    
    575,647
    
    
    
    262,749
    
    
    
    12,899
    
    
    
    851,295Depreciation and amortization
    
    
    18,391
    
    
    
    22,449
    
    
    
    571
    
    
    
    41,411Operating income
    
    $
    102,745
    
    
    $
    54,654
    
    
    $
    (13,470
    )
    
    $
    143,929
  (a)
    
    Revenues in our Government segment for the three months ended
September 30, 2004 and 2003 include revenues from operations divested
during fiscal year 2004 of $0.5 million and $177.6 million,
respectively. Revenues in our Commercial segment for the three months
ended September 30, 2003 include revenues from operations divested
during fiscal year 2004 of $5.1 million.  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. We
service these loans for investors under an outsourcing arrangement and do not
acquire any servicing rights that are transferable by us to a third party.
At September 30, 2004, we serviced a FFEL portfolio of approximately 1.5
million loans with an outstanding principal balance of approximately $19.2
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 then
we repackage the loans for sale to third parties. We evaluate our exposure
under our purchase obligations on defaulted 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 defaulted loans. This reserve was approximately $3.9
million and $3.7 million at September 30, 2004 and June 30, 2004,
respectively. During quarters ended September 30, 2004 and 2003, we
purchased and charged against the reserve $0.4 million and $0.9 million of
loans, respectively, and recovered or sold loans with proceeds totaling $0.2
million and $0.5 million, respectively, which were credited to our reserve.
We recorded provisions of $0.4 million and $0.6 million in the quarters ended
September 30, 2004 and 2003, respectively.  Certain contracts, primarily in our Government segment, require us to provide
a surety bond or a letter of credit as a guarantee of performance. As of
September 30, 2004, $287.1 million of outstanding surety bonds and $84.7
million of our outstanding letters of credit secure our performance of
contractual obligations with our clients. In addition, we had approximately
$9.2 million of letters of credit which secure our casualty insurance
programs. 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 our new Credit Facility to respond to future requests
for proposals. 8




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  We are obligated to make certain contingent payments to former shareholders
of acquired entities upon satisfaction of certain contractual criteria. As
of September 30, 2004, the maximum aggregate amount of the outstanding
contingent obligations is approximately $87 million. Upon satisfaction of the
specified contractual criteria, any such payment would result primarily in a
corresponding increase in goodwill. During the first quarter of fiscal year
2005, we paid $0.4 million related to these obligations.  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 former 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 them 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 included
attorneys fees and pre-judgment interest. The judgment was appealed by the
former employees and us. As a result of the appeals, the trial courts
judgment was reversed and the case was remanded to the trial court for
further proceedings, except that the trial court judgment was affirmed in
part as to one of the former employees and the trial courts dismissal of
certain of our affirmative defenses was upheld. The amount of the judgment
for the one former employee whose judgment was upheld has been settled for
$1.3 million. In August 2004, mediation was conducted which resulted in the
settlement of claims of the other former employees. As a result of this
settlement, we accrued $10 million in other operating expenses in the fourth
quarter of fiscal year 2004 related to this settlement and paid $10 million
in full settlement of all claims of the other former employees in August
2004.  One of our subsidiaries, ACS Defense, LLC, 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 (DOJ). 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 DOJs inquiry was approximately $17.2
million for the fiscal year ended June 30, 2004 representing approximately
0.4% of our revenue for fiscal year 2004. In February 2004, we sold the
contracts associated with the Hanscom Air Force Base relationship to ManTech
International Corporation; however, we have agreed to indemnify ManTech with
respect to this DOJ investigation. We are continuing our previously announced
internal investigation of this matter through outside legal counsel and we
are continuing to cooperate with the DOJ in producing documents in response
to the subpoena. At this stage of this inquiry, we are unable to express an
opinion as to its likely outcome.  We have indemnified Lockheed Martin Corporation against certain specified
claims from certain pre-sale litigation, investigations, government audits
and other issues related to the sale of the majority of our Federal business
to Lockheed Martin Corporation in fiscal year 2004. Our maximum exposure under these
indemnifications is $85 million; however, we believe the actual exposure to
be significantly less. As of September 30, 2004, other accrued liabilities
include a reserve for these claims in an amount we believe to be adequate at
this time. As discussed above, we have agreed to indemnify ManTech
International Corporation with respect to the DOJ investigation related to
purchasing activities at Hanscom during the period 1998-2000.  Another of our subsidiaries, ACS State & Local Solutions, Inc. (ACS SLS),
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
DOJ. The inquiry concerns the teaming arrangements between ACS SLS and Tier
on child support payment processing contracts awarded to ACS SLS, and Tier as
a subcontractor to ACS SLS, in New York, Illinois and Ohio. Effective June
30, 2004, Tier was no longer a subcontractor to us in Ohio. Our revenue from the contracts for which Tier was a subcontractor was
approximately $67 million in fiscal year 2004 and approximately $10.2 million
in the first quarter of fiscal year 2005, representing approximately 1.6% and
1.0% of our fiscal year 2004 and first quarter fiscal year 2005 revenues,
respectively. Our teaming arrangement also contemplated the California child
support payment processing request for proposals, which was issued in late
2003; however, we did not enter into a teaming agreement with Tier for the
California request for proposals. Based on Tiers recent filings with the
Securities and Exchange Commission, we understand that on November 20, 2003
the DOJ granted conditional amnesty to Tier in connection with this inquiry
pursuant to the DOJs Corporate Leniency Policy. The policy provides that
the DOJ will not bring any criminal charges against Tier as long as it
continues to fully cooperate in the inquiry (and makes restitution payments
if it is determined that parties were injured as a result of impermissible
anticompetitive conduct). We are continuing our previously announced
internal investigation of this matter through outside legal counsel and we
are continuing to cooperate with the DOJ in producing documents in response
to the subpoena. At this stage of this inquiry, we are unable to express an
opinion as to its likely outcome. 9




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  On January 30, 2004, the Florida Agency for Workforce Innovations (AWI)
Office of Inspector General (OIG) issued a report that reviewed 13 Florida
workforce regions, including Dade and Monroe counties, and noted concerns
related to the accuracy of customer case records maintained by our local
staff. Our total revenue generated from the Florida workforce services
amounts to approximately 1% of our total fiscal year 2004 revenue. In
March 2004, we filed our response to the OIG report. On May 20, 2004, at a
meeting of the Workforce Florida, Inc. (WFI) Board of Directors which was
attended by representatives of ACS SLS, which is our subsidiary performing
these services, a representative of WFI, which is the principal workforce
policy organization for the State of Florida and oversees and monitors the
administration of the States workforce policy as well as the programs and
services carried out by regional workforce boards and AWI, indicated that WFI
did not see a systemic problem with the performance of these workforce
services by ACS SLS and that it considered the issue closed. There were also certain contract billing issues
that arose during the course of our performance of our workforce contract in Dade County, Florida, which ended in June 2003.
However, during the first quarter of fiscal year 2005, we settled all financial issues with Dade County with respect to our workforce contract with that
county and the settlement is fully reflected in our results of
operations for the first quarter of fiscal year 2005. We were also
advised in February 2004 that the SEC is conducting an informal investigation
into the matters covered by the OIGs report. On March 22, 2004, ACS SLS
received a grand jury document subpoena issued by the U.S. District Court for
the Southern District of Florida. The subpoena was issued in connection with
an inquiry being conducted by the DOJ and the Inspector Generals Office of
the U.S. Department of Labor (DOL) into the subsidiarys workforce
contracts in Dade and Monroe counties in Florida, which expired in June 2003,
and which were included in the OIGs report. On August 25, 2004, ACS SLS received a grand jury document subpoena issued by
the U.S. District Court for the Middle District of Florida in connection with
an inquiry being conducted by the DOJ and the Inspector Generals Office of
the DOL. The subpoena relates to a contract in Pinellas County in Florida
for the period from January 1999 to the contracts expiration in March 2001,
which was prior to our acquisition of this business from Lockheed Martin
Corporation in August 2001. Further, we settled a civil lawsuit with Pinellas
County in December 2003 with respect to claims related to services rendered
to Pinellas County by Lockheed Martin Corporation prior to our acquisition of
ACS SLS (those claims having been transferred with ACS SLS as part of the
acquisition), and which settlement resulted in Pinellas County paying ACS SLS
an additional $600,000. We are continuing our internal investigation of
these matters through outside legal counsel and we are continuing to
cooperate with the DOJ, the SEC and DOL to produce documents in connection
with their investigations. At this stage of these investigations, we are
unable to express an opinion as to their likely outcome. We anticipate that
we may receive additional subpoenas for information in other Florida
Workforce regions as a result of the AWI report issued in January 2004.  In June 2004, the Mississippi Department of Environmental Quality (MDEQ)
issued a Notice of Violation to ACS Image Solutions, Inc., one of our
subsidiaries, that alleged noncompliance with the Clean Water Act and the
Federal Resource Conservation and Recovery Act. On September 20, 2004, we
agreed to settle this matter with the MDEQ for $150,000. We have closed the
specific operation whose activities resulted in this Notice.  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 other
proceedings, we do not believe these other actions, in the aggregate, will
have a material adverse effect on our financial position, results of
operations or liquidity.  10.
    
    SUBSEQUENT EVENTS  On October 27, 2004, we entered into a Five Year Competitive Advance and
Revolving Credit Facility Agreement with JPMorgan Chase Bank, as
Administrative Agent (JP Morgan), and Wells Fargo Bank, National
Association, as Syndication Agent, and various other lenders (the Credit
Facility), with the proceeds from advances under the Credit Facility to be
used for general corporate purposes. The Credit Facility provides for an
unsecured $1.5 billion multi-currency revolving credit and competitive
advance facility (fully available in US$, Euros or competitive loans in any
currency). Multi-currency commitments (available in certain specified
currencies other than US$ or Euros) in an initial aggregate amount of $200
million and swing line loans in an amount up to $150 million are provided
under the facility. The Credit Facility may be increased by up to $300
million, subject to certain conditions. The lending commitments under the
Credit Facility are scheduled to terminate October 27, 2009. At the closing
of the Credit Facility, we borrowed $316 million under the Credit Facility to
pay off and terminate the Prior Facility (defined below). In addition, $94
million in letters of credit were issued under the Credit Facility to replace
letters of credit outstanding under the Prior Facility.  Other than competitive loans and swing line loans, advances under the Credit
Facility will bear interest at a Eurocurrency Rate or a Base Rate (generally
equal to the prime rate of JP Morgan), plus a percentage determined based on
our credit rating. We are required to pay accrued interest at established
intervals based upon our elected interest period. 10




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  Among other fees, we will pay a facility fee of 0.110% per annum (due
quarterly), based on our credit rating on the aggregate commitment of the
Credit Facility, whether used or unused. We will also pay a utilization fee
of 0.125% on the total amount outstanding under the Credit Facility for each
day that such amount exceeds 50% of the aggregate commitments then in effect.  The Credit Facility contains customary covenants, including but not limited
to, restrictions on our ability, and in certain instances, our subsidiaries
ability, to incur liens, merge or dissolve, finance its accounts receivables,
or sell or transfer assets. The Credit Facility also limits our ability to
incur additional indebtedness at the subsidiary level. In addition, we may
not permit our consolidated leverage ratio to exceed 2.75 to 1.0 or our
consolidated interest coverage ratio to be less than 3.50 to 1.0 during
specified periods.  Upon the occurrence of certain events of default, our obligations under the
Credit Facility may be accelerated and the lending commitments under the
Credit Facility terminated. Such events of default include, but are not
limited to, payment default to lenders, material inaccuracies of
representations and warranties, covenant defaults, material payment defaults
(other than under the Credit Facility), voluntary and involuntary bankruptcy
proceedings, material money judgments, material ERISA events, or change of
control.  Simultaneously with entering into the $1.5 billion Credit Facility referenced
above, we terminated our existing $875 million revolving credit facility (the
Prior Facility) on October 27, 2004. The lending commitments under the
Prior Facility were evidenced by that certain Revolving Credit Agreement,
dated as of September 12, 2002 among us and other borrowers from time to time
party thereto, Wells Fargo Bank Texas, National Association, as
administrative agent, and various other lenders, and were scheduled to expire
in December 2005. 11




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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 the 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
competitive 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 in the United States (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
adopted by the Securities and Exchange Commission (SEC). We have presented herein and we will present in other
information we publish that contains any of these non-GAAP financial measures 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 GAAP.  GENERAL  We are a Fortune 500 and S&P 500 company with more than 43,000 people providing
business process and technology outsourcing solutions to commercial and
government clients. Our clients have time-critical, transaction-intensive
business and information processing needs, and we typically service these needs
through long-term contracts.  During the quarter ended September 30, 2004, we signed contracts with new
clients and incremental business with existing clients representing $127
million of annualized recurring revenue. The Government segment contributed 53%
of the new contract signings, including contracts with the State of Texas to
support the statewide roll-out of the Medicaid Primary Care Case Management,
Center for Medicare and Medicaid Services for the Medicare-approved
Transitional Assistance Card for Long Term Care Residents, and Maryland
Department of Health and Mental Hygiene to provide claims processing services.
The Commercial segment contributed 47% of the new contract signings, including
contracts with Nextel to provide business process outsourcing services and
Scotts Company to provide information technology services. 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 of our services.  In November 2003, we completed the sale of a majority of our Federal government
business to Lockheed Martin Corporation (the Divested Federal Business). As
of September 30, 2003, we classified as heldforsale those assets and
liabilities related to that portion of our Federal business expected to be
disposed of in the 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, we suspended
depreciation and amortization in the amount of $4.3 million ($2.7 million, net
of income tax) in the first quarter of fiscal year 2004 related to those
long-lived assets held for sale at September 30, 2003. We also completed the
sale of two other small contracts during fiscal year 2004. Revenues in our
Government segment for the three months ended September 30, 2004 and 2003
include revenues from operations divested through June 30, 2004 (primarily the
Divested Federal Business) of $0.5 million and $177.6 million, respectively.
Revenues in our Commercial segment for the three months ended September 30,
2003 include revenues from operations divested as of June 30, 2004 (primarily
the Divested Federal Business) of $5.1 million. 12




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REVENUE GROWTH  Internal revenue growth is measured as total revenue growth less acquired
revenue from acquisitions and revenues from divested operations. 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 the
revenue associated with divested operations and we 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 30,2004
    
    2003
    
    $ Growth
    
    Growth %Consolidated:Total Revenues
    
    $
    1,046,182
    
    
    $
    1,036,635
    
    
    $
    9,547
    
    
    
    1
    %Less: Divestitures (1)
    
    
    (539
    )
    
    
    (182,646
    )
    
    
    182,107Adjusted
    
    $
    1,045,643
    
    
    $
    853,989
    
    
    $
    191,654
    
    
    
    22
    %Acquired revenues (2)
    
    $
    96,648
    
    
    $
    
    
    
    $
    96,648
    
    
    
    11
    %Internal revenues
    
    
    948,995
    
    
    
    853,989
    
    
    
    95,006
    
    
    
    11
    %Total
    
    $
    1,045,643
    
    
    $
    853,989
    
    
    $
    191,654
    
    
    
    22
    %Government:Total Revenues
    
    $
    551,519
    
    
    $
    696,783
    
    
    $
    (145,264
    )
    
    
    (21
    )%Less: Divestitures (1)
    
    
    (539
    )
    
    
    (177,552
    )
    
    
    177,013Adjusted
    
    $
    550,980
    
    
    $
    519,231
    
    
    $
    31,749
    
    
    
    6
    %Acquired revenues (2)
    
    $
    10,516
    
    
    $
    
    
    
    $
    10,516
    
    
    
    2
    %Internal revenues
    
    
    540,464
    
    
    
    519,231
    
    
    
    21,233
    
    
    
    4
    %Total
    
    $
    550,980
    
    
    $
    519,231
    
    
    $
    31,749
    
    
    
    6
    %Commercial:Total Revenues
    
    $
    494,663
    
    
    $
    339,852
    
    
    $
    154,811
    
    
    
    46
    %Less: Divestitures (1)
    
    
    
    
    
    
    (5,094
    )
    
    
    5,094Adjusted
    
    $
    494,663
    
    
    $
    334,758
    
    
    $
    159,905
    
    
    
    48
    %Acquired revenues (2)
    
    $
    86,132
    
    
    $
    
    
    
    $
    86,132
    
    
    
    26
    %Internal revenues
    
    
    408,531
    
    
    
    334,758
    
    
    
    73,773
    
    
    
    22
    %Total
    
    $
    494,663
    
    
    $
    334,758
    
    
    $
    159,905
    
    
    
    48
    %
  (1)
    
    Divested revenues are revenues of businesses divested as if the
divestiture had occurred at the beginning of the period. Amounts
presented are primarily related to the sale of the Divested Federal
Business and other fiscal year 2004 divestitures.  (2)
    
    Acquired revenues are based on pre-acquisition normalized revenues of
acquired companies. 13




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RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements
of income as a percentage of revenues: Three months endedSeptember 30,2004
    
    2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Wages and benefits
    
    
    41.3
    
    
    
    46.0Services and supplies
    
    
    26.3
    
    
    
    25.5Rent, lease and maintenance
    
    
    11.4
    
    
    
    9.3Depreciation and amortization
    
    
    5.2
    
    
    
    4.0Other operating expenses
    
    
    1.0
    
    
    
    1.3Total operating expenses
    
    
    85.2
    
    
    
    86.1Operating income
    
    
    14.8
    
    
    
    13.9Interest expense
    
    
    0.4
    
    
    
    0.5Other non-operating expense (income),
net
    
    
    0.0
    
    
    
    0.0Pretax profit
    
    
    14.4
    
    
    
    13.4Income tax expense
    
    
    5.4
    
    
    
    5.0Net income
    
    
    9.0
    %
    
    
    8.4
    %
 COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003 Revenues

In the first quarter of fiscal year 2005, our revenue increased $9.5 million,
or 1%, to $1.046 billion from $1.037 billion in the first quarter of fiscal
year 2004. Revenues related to the Divested Federal Business and other small
contracts (collectively, the 2004 Divestitures) were $0.5 million and $182.6
million in the quarters ended September 30, 2004 and 2003, respectively.
Excluding the impact of the revenues related to the 2004 Divestitures, revenues
increased from $854 million in the first quarter of fiscal year 2004 to $1.046
billion in the first quarter of fiscal year 2005, or 22%. Internal revenue
growth, excluding the impact of the revenues related to the 2004 Divestitures,
for the first quarter of fiscal year 2005 was 11%. The remainder of the growth
was related to acquisitions. Revenue in our Government segment, which represents 53% of consolidated revenue
for the first quarter of fiscal year 2005, decreased $145.3 million, or 21%, to
$551.5 million in the first quarter of fiscal year 2005 compared to the same
period last year. Revenues related to the 2004 Divestitures included in the
Government segment were $0.5 million and $177.6 million for the quarters ended
September 30, 2004 and 2003, respectively. Excluding the impact of the
revenues related to the 2004 Divestitures, total Government segment revenues
grew 6% in the first quarter of fiscal year 2005 to $551 million from $519.2
million in the first quarter of fiscal year 2004. Internal revenue growth,
excluding the impact of the revenues related to the 2004 Divestitures, was 4%,
primarily due to increased revenues for our Texas Medicaid, Department of
Education, North Carolina Medicaid and New Jersey EZPass contracts and our
unclaimed property business, offset by decreases related to the Georgia
Department of Community Health contract and lower HIPAA related revenues. These
contracts collectively represent 78% of our internal growth for the period in
this segment. The remaining growth was from acquisitions. Revenue in our Commercial segment, which represents 47% of consolidated revenue
for the first quarter of fiscal year 2005, increased $154.8 million, or 46%, to
$494.7 million in the first quarter of fiscal year 2005 compared to the same
period last year. Revenues related to the Divested Federal Business included
in the Commercial segment were $5.1 million in the first quarter of fiscal year
2004. Excluding the impact of the revenues related to the Divested Federal
Business, revenues grew 48% in the first quarter of fiscal year 2005 compared
to the same period in fiscal year 2004. Internal revenue growth, excluding
the impact of the revenues related to the Divested Federal Business, was 22%
due primarily to increased revenues related to contracts with McDonalds, Nextel, Goodyear,
University of Phoenix, Queens Medical Center, General Motors, General Electric,
and Trilegiant, as well as revenues related to the termination of our relationship
with Gateway, which was effectively terminated during the first quarter of
fiscal year 2005. These increases were partially offset by the loss of the
Roadway contract, which was terminated at the end of fiscal year 2004 due to 14




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Roadways acquisition by Yellow Freight. These contracts collectively represent 72% of our internal
growth for the period in this segment. The remaining growth was from
acquisitions. Operating Expenses Wages and benefits decreased $45.3 million, or 9.5%, to $431.8 million. As a
percentage of revenue, wages and benefits decreased 4.7% to 41.3% in the first
quarter of fiscal year 2005 from 46% in the same quarter of fiscal year 2004.
The sale of the Divested Federal Business and the acquisition of Lockheed
Martin Corporations commercial information technology outsourcing business
were primarily responsible for the decrease in wages and benefits as a
percentage of revenue. The Divested Federal Business, which provided primarily
system integration services to the Federal Government and its agencies, had a
higher proportion of labor related expenses to its revenues. The acquisition
of Lockheed Martin Corporations commercial information technology outsourcing
business has a lower proportion of labor costs as a percentage of revenue than
our business process outsourcing operations. Other factors that decreased
wages and benefits as a percentage of revenue include Gateway revenues in the
first quarter of fiscal year 2005, which had a lower proportion of wages and
benefit costs due to the termination of the contract, and increased revenues
related to our unclaimed property business in the first quarter of fiscal year
2005, which had a minimal impact on wages and benefits. In addition, we
experienced a reduction in HIPAA remediation work during the first quarter of
fiscal year 2005 versus 2004, which was labor intensive and therefore had a
higher proportion of wages and benefits as compared to revenue. Services and supplies increased $10.1 million, or 3.8%, to $275.1 million. As
a percentage of revenue, services and supplies increased 0.8% to 26.3% in the
first quarter of fiscal year 2005 from 25.5% in the first quarter of fiscal
year 2004. The increase as a percentage of revenue is primarily due to
increased subcontractor costs related to the new Common Services for Borrowers
contract with the Department of Education and lower HIPAA revenues during the
first quarter of fiscal year 2005, which had a low component of services and
supplies expense. This increase was offset by the impact of the sale of the
Divested Federal Business which had a lower component of services and supplies
than our ongoing operations, as well as revenues related to the Gateway
contract, which had a lower proportion of services and supplies expense during
the first quarter of fiscal year 2005 due to the contract termination. Rent, lease and maintenance increased $23.1 million, or 24%, to $119 million.
As a percentage of revenue, rent, lease and maintenance increased to 11.4% in
the first quarter of fiscal year 2005 from 9.3% in the first quarter of fiscal
year 2004. This increase was primarily due to the impact of the sale of the
Divested Federal Business in fiscal year 2004, which primarily provided system
integration services to its clients. These services typically have a lower
component of rent, lease and maintenance than information technology services,
which have higher equipment costs. The acquisition of Lockheed Martin
Corporations commercial information technology outsourcing business also
increased rent, lease and maintenance as a percentage of revenue, since
information technology services have higher equipment costs than business
process outsourcing services. Depreciation and amortization increased $12.9 million, or 31.2%, to $54.3
million. As a percentage of revenue, depreciation and amortization increased
1.2%, to 5.2% due to increased capital expenditures and additions to intangible
assets necessary to support our new business, as well as the cessation of $4.3
million of depreciation in the first quarter of fiscal year 2004 as a result of
classifying the assets related to the Divested Federal Business as
held-for-sale at September 30, 2003. In addition, depreciation and
amortization increased as a percentage of revenue due to accelerated intangible
asset amortization related to the Gateway contract termination. Interest expense Interest expense decreased $1.3 million in the first quarter of fiscal year
2005 compared to the first quarter of fiscal year 2004, primarily as a result
of the conversion of our 3.5% Subordinated Convertible Notes to Class A common
stock in the third quarter of fiscal year 2004 partially offset by interest
expense on higher average balances on our $875 million Prior Facility (defined
below) during the current year quarter. Income tax expense Our effective tax rate was approximately 37.5% in the first quarter of fiscal
year 2005. Our effective tax rate is higher than the 35% statutory rate due to
the net effect of state income and foreign 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. During the first quarter of fiscal year 2005, we generated approximately $119.1
million in cash flow from operations compared to $59.4 million in the same
period of fiscal year 2004. The increase from the prior year quarter was
primarily a result of growth in our business and the corresponding increase in
net income as well as an increase in accounts receivable collections. These increases were offset by the
GSA/FTSA settlement of $10 million (see Note 9), which was paid during the
quarter, and increased payments for accrued compensation due to the timing of
payments of employee benefit obligations. The first quarter of the fiscal year is
typically our lowest quarter of cash flow due to the payment of annual incentive compensation
in August. 15




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Free cash flow was approximately $48.2 million for the first quarter of fiscal
year 2005 versus approximately $9.1 million for the first quarter of fiscal year 2004. The increase is due to the items
discussed above offset by an increase in our capital expenditures, primarily related to new business signings. Our capital
expenditures, defined as purchases of property, equipment and software, net,
and additions to other intangible assets, were approximately $70.9 million, or
6.8% of total revenues, and $50.3 million, or 4.9% of total revenues, for the
quarters ended September 30, 2004 and 2003, respectively. 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) less
additions to other intangible assets (as reported in our consolidated
statements of cash flows). We believe this free cash flow metric provides an
additional measure of available cash flow after we have satisfied the capital
expenditure requirements of our operations, and should not be taken in
isolation to be a measure of cash flow available for us to satisfy all our
obligations and execute our business strategies. We also rely on cash flows
from investing and financing activities, which together with free cash flow,
are expected to be sufficient for us to execute our business strategies. Our
measure of free cash flow may not be comparable to similarly titled measures of
other companies. The following table sets forth the calculations of free cash
flow (in thousands): Three months endedSeptember 30,2004
    
    2003Net cash provided by operating activities
    
    $
    119,123
    
    
    $
    59,382Purchases of property, equipment and software, net
    
    
    (61,587
    )
    
    
    (42,760
    )Additions to other intangible assets
    
    
    (9,360
    )
    
    
    (7,531
    )Free cash flow
    
    $
    48,176
    
    
    $
    9,091
 During the three months ended September 30, 2004, net cash used in investing
activities was $144.9 million. We used $70.7 million for acquisitions during
the period, primarily the purchase of BlueStar Solutions, Inc. and Heritage
Information Systems, Inc. Cash used for the purchase of property, equipment
and software and additions to other intangible assets was $70.9 million and
$50.3 million for the quarters ended September 30, 2004 and 2003, respectively.
Cash used for the purchase of investments to support deferred compensation
plan obligations was $4.5 million for the quarter ended September 30, 2004. During the first three months of fiscal year 2005, cash provided by financing
activities was $8.4 million. Such financing activities include proceeds from
stock options and proceeds from issuance of treasury shares to fund employer
contributions under our Employee Stock Purchase and 401(k) plans offset by net
repayments of debt, primarily on our Prior Facility (defined below). During the first quarter of fiscal year 2005, we had an $875 million unsecured
revolving credit facility (Prior Facility), which would have matured in
December 2005. The Prior Facility provided for unsecured borrowings at rates
based on our credit rating. Borrowings under the Prior Facility bore interest
at LIBOR (1.84% at September 30, 2004) plus 0.575%. The agreement contained
certain covenants, including maintaining certain interest coverage and
debt-to-equity ratios, as defined by the agreement. At September 30, 2004, we
were in compliance with these covenants. Draws made under our Prior Facility were made to fund cash acquisitions, share
repurchases and for general working capital requirements. During the twelve
months ending September 30, 2004, the balance outstanding under our Prior
Facility for borrowings ranged from $0 to $443.9 million. At September 30,
2004, we had approximately $418.1 million available on our Prior Facility after
giving effect to $93.9 million of outstanding letters of credit that secure
certain contractual performance and other obligations and which reduce the
availability of our Prior Facility. At September 30, 2004, we had $363 million
outstanding on our Prior Facility, which is reflected in long-term debt. On October 27, 2004, we entered into a Five Year Competitive Advance and
Revolving Credit Facility Agreement with JPMorgan Chase Bank, as Administrative
Agent (JP Morgan), and Wells Fargo Bank, National Association, as Syndication
Agent, and various other lenders (the Credit Facility), with the proceeds
from advances under the Credit Facility to be used for general corporate
purposes. The Credit Facility provides for an unsecured $1.5 billion
multi-currency revolving credit and competitive advance facility (fully
available in US$, Euros or competitive loans in any currency). Multi-currency
commitments (available in certain specified currencies other than US$ or Euros)
in an initial aggregate amount of $200 million and swing line loans in an
amount up to $150 million are provided under the facility. The Credit Facility
may be increased by up to $300 million, subject to certain conditions. The
lending commitments under the Credit Facility are scheduled to terminate
October 27, 2009. At the closing of the Credit Facility, we borrowed $316
million under the Credit Facility to pay off and terminate the Prior Facility.
In addition, $94 million in letters of credit were issued
under the Credit Facility to replace letters of credit outstanding under the
Prior Facility. Other than competitive loans and swing line loans, advances under the Credit
Facility will bear interest at a Eurocurrency Rate or a Base Rate (generally
equal to the prime rate of JP Morgan), plus a percentage determined based on
our credit rating. We are required to pay accrued interest at established
intervals based upon our elected interest period. 16




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Among other fees, we will pay a facility fee of 0.110% per annum (due
quarterly), based on our credit rating on the aggregate commitment of the
Credit Facility, whether used or unused. We will also pay a utilization fee of
0.125% on the total amount outstanding under the Credit Facility for each day
that such amount exceeds 50% of the aggregate commitments then in effect. The Credit Facility contains customary covenants, including but not limited to,
restrictions on our ability, and in certain instances, our subsidiaries
ability, to incur liens, merge or dissolve, finance its accounts receivables,
or sell or transfer assets. The Credit Facility also limits our ability to
incur additional indebtedness at the subsidiary level. In addition, we may not
permit our consolidated leverage ratio to exceed 2.75 to 1.0 or our
consolidated interest coverage ratio to be less than 3.50 to 1.0 during
specified periods. Upon the occurrence of certain events of default, our obligations under the
Credit Facility may be accelerated and the lending commitments under the Credit
Facility terminated. Such events of default include, but are not limited to,
payment default to lenders, material inaccuracies of representations and
warranties, covenant defaults, material payment defaults (other than under the
Credit Facility), voluntary and involuntary bankruptcy proceedings, material
money judgments, material ERISA events, or change of control. Simultaneously with entering into the $1.5 billion Credit Facility referenced
above, we terminated our $875 million Prior Facility on October 27, 2004. The
lending commitments under the Prior Facility were evidenced by that certain
Revolving Credit Agreement, dated as of September 12, 2002 among us and other
borrowers from time to time party thereto, Wells Fargo Bank Texas, National
Association, as administrative agent, and various other lenders, and were
scheduled to expire in December 2005. Certain contracts, primarily in our Government segment, require us to provide a
surety bond or a letter of credit as a guarantee of performance. As of
September 30, 2004, $287.1 million of outstanding surety bonds and $84.7
million of our outstanding letters of credit secure our performance of
contractual obligations with our clients. In addition, we had approximately
$9.2 million of letters of credit which secure our casualty insurance programs.
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 Credit
Facility to respond to future requests for proposals. At September 30, 2004, we had cash and cash equivalents of $59.6 million
compared to $76.9 million at June 30, 2004. Our working capital (defined as
current assets less current liabilities) increased $29 million to $435.9
million at September 30, 2004 from $406.9 million at June 30, 2004. Our current
ratio (defined as total current assets divided by total current liabilities)
was 1.7 and 1.6 at September 30, 2004 and June 30, 2004, 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 12.1%
and 12.6% at September 30, 2004 and June 30, 2004, respectively. Our Board of Directors has authorized two share repurchase programs totaling
$1.25 billion of our Class A common stock. 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 and on April 29, 2004, we announced that
our Board of Directors authorized a new, incremental share repurchase program
of up to $750 million of our Class A common stock. The programs, which are
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 on hand, cash flow
from operations, and borrowings under our Credit Facility. As of September 30,
2004, we had repurchased approximately 15 million shares at a total cost of
approximately $743.2 million. We did not repurchase any shares in the first
quarter of fiscal year 2005. As of September 30, 2004, there
remained approximately
$506.8 million authorized under our share repurchase programs.
Through November 3, 2004, on a trade date basis, we have repurchased 15.2
million shares at a total cost of approximately $753.9 million. 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 and
operating needs, including capital expenditures, and to meet the cash
requirements of our contractual obligations below. In addition, we intend to
continue our growth through acquisitions, 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. 17




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DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
AS OF SEPTEMBER 30, 2004 (IN THOUSANDS): Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt (1)
    
    $
    365,722
    
    
    $
    2,103
    
    
    $
    363,619
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    6,643
    
    
    
    3,972
    
    
    
    2,467
    
    
    
    204
    
    
    
    Operating leases
    
    
    481,416
    
    
    
    140,876
    
    
    
    175,807
    
    
    
    77,822
    
    
    
    86,911Total Contractual Cash Obligations
    
    $
    853,781
    
    
    $
    146,951
    
    
    $
    541,893
    
    
    $
    78,026
    
    
    $
    86,911Amount 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
    
    $
    93,939
    
    
    $
    93,939
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    287,061
    
    
    
    249,591
    
    
    
    37,455
    
    
    
    15
    
    
    
    Total Commercial Commitments
    
    $
    381,000
    
    
    $
    343,530
    
    
    $
    37,455
    
    
    $
    15
    
    
    $
    
 (1) Includes $363 million related to our Prior Facility. As discussed previously, certain contracts, primarily in our Government
segment, require us to provide a surety bond or a letter of credit as a
guarantee of performance. As of September 30, 2004, $287.1 million of
outstanding surety bonds and $84.7 million of our outstanding letters of credit
secure our performance of contractual obligations with our clients. In
addition, we had approximately $9.2 million of letters of credit which secure
our casualty insurance programs. 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 are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
September 30, 2004, the maximum aggregate amount of the outstanding contingent
payments to former shareholders of acquired entities is approximately $87
million. Upon satisfaction of the specified contractual criteria, any such
payment would result primarily in a corresponding increase in goodwill. During
the first quarter of fiscal year 2005, we paid $0.4 million related to these
obligations. We have indemnified Lockheed Martin Corporation against certain specified
claims from certain pre-sale litigation, investigations, government audits and
other issues related to the Divested Federal Business. Our contractual maximum
exposure under these indemnifications is $85 million; however, we believe the
actual exposure to be significantly less. As of September 30, 2004, other
accrued liabilities include a reserve for these claims in an amount we believe
to be adequate at this time. We have agreed to
indemnify ManTech International Corporation with respect to the DOJ
investigation related to purchasing activities at Hanscom during the period
1998-2000. (Please see Part II. Item 1. Legal Proceedings for further discussion.) 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. We service
these loans for investors under an outsourcing arrangement and do not acquire
any servicing rights that are transferable by us to a third party. At
September 30, 2004, we serviced a FFEL portfolio of approximately 1.5 million
loans with an outstanding principal balance of approximately $19.2 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 then we
repackage the loans for sale to third parties. We evaluate our exposure under
our purchase obligations on defaulted 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 defaulted loans. This reserve was approximately $3.9 million
and $3.7 million at September 30, 2004 and June 30, 2004, respectively. During
quarters ended September 30, 2004 and 2003, we purchased and charged against
the reserve $0.4 million and $0.9 million of loans, respectively, and recovered
or sold loans with proceeds totaling $0.2 million and $0.5 million,
respectively, which were credited to our reserve. We recorded provisions of
$0.4 million and $0.6 million in the quarters ended September 30, 2004 and
2003, respectively. 18




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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 used in the preparation of our
consolidated financial statements involve significant judgments and estimates. Revenue recognition. A significant portion of our revenue is recognized based
on objective criteria that does not require significant estimates or
uncertainties. For example, transaction volumes and time and costs under time
and material and cost reimbursable arrangements are based on specific,
objective criteria under the contracts. Accordingly, revenues recognized under
these methods do not require the use of significant estimates that are
susceptible to change. Revenue recognized using the percentage-of-completion
accounting method does require the use of estimates and judgment as discussed
below. Our policy follows the guidance from SEC Staff Accounting Bulletin 104 Revenue
Recognition (SAB 104). SAB 104 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements and updates
existing Staff Accounting Bulletin Topic 13 to be consistent with Emerging
Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). We recognize revenues when persuasive evidence
of an arrangement exists, the services have been provided to the client, the
sales price is fixed or determinable, and collectibility is reasonably assured. During fiscal year 2004, approximately 62% of our revenue was recognized based
on transaction volumes, approximately 19% were fixed fee based, wherein our
revenue is earned as we fulfill our performance obligations under the
arrangement, approximately 10% were related to cost reimbursable contracts,
approximately 5% of our revenues were recognized using percentage-of-completion
accounting and the remainder is related to 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 for business process outsourcing services are recognized as services
are rendered, generally on the basis of the number of accounts or transactions
processed. Information technology processing revenues are recognized as
services are provided to the client, generally at the contractual selling
prices of resources consumed or capacity utilized by our clients. 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 on certain fixed price contracts where we provide information
technology system development and implementation services 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. These
services require that we perform significant, extensive and complex design,
development, modification and implementation activities for our customers
systems. Performance will often extend over long periods, and our right to
receive future payment depends on our future 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
longer term nature of these projects, 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 projects include, but
are not limited to, the availability of labor and labor productivity, the
nature and complexity of the work to be performed, and the impact of delayed
performance. 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. EITF 00-21 addresses the accounting treatment for an arrangement to provide the
delivery or performance of multiple products and/or 19




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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. We adopted the
provisions of EITF 00-21 on a prospective basis to transactions entered into
after July 1, 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. 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. In addition, in connection with our revenue
arrangements, we incur costs to originate contracts and to perform the
transition and setup activities necessary to enable us to perform under the
terms of the arrangement. We capitalize certain incremental direct costs in
connection with these activities and amortize them over the term of the
arrangement. From time to time, we also provide certain inducements to
customers in the form of various arrangements, including contractual credits,
which are capitalized and amortized as a reduction of revenue over the term of
the contract. 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 a non-cash
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 fixed
costs related to our information 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 all or a part of a contract by a client or deterioration of the
financial condition of a client. We may be required to make significant capital
investments in order to attract and retain large outsourcing agreements. The
termination of all or a part of a client contract or the deterioration of the
financial condition or prospects of a client has in the past, and may in the
future, result in an impairment of the net book value of the assets recorded,
including a portion of our intangible assets, and a reduction in our earnings
and cash flow. Competition. We expect to encounter additional competition as we address new
markets and new competitors enter our existing markets. If we are forced to
lower our pricing or if demand for our services decreases, our business,
financial condition, results of operations, and cash flow may be materially and
adversely affected. Some 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. 20




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Difficulties in executing our acquisition strategy. We intend to continue to
expand our business through the acquisition of complementary companies. We
cannot, however, make any assurances that we will be able to identify any
potential acquisition candidates or consummate any additional acquisitions or
that any future acquisitions will be successfully integrated or will be
advantageous to us. Without additional acquisitions, we are unlikely to
maintain historical total growth rates. Failure to properly manage our operations and our growth. We have rapidly
expanded our operations in recent years. We intend to continue expansion in the
foreseeable future to pursue existing and potential market opportunities. This
rapid growth places a significant demand on our management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures, and controls on a timely basis. If we fail
to implement these systems, procedures and controls on a timely basis, we may
not be able to service our clients needs, hire and retain new employees,
pursue new business, complete future acquisitions or operate our businesses
effectively. We could also trigger contractual credits to clients. Failure to
properly transition new customers to our systems, properly budget transition
costs or accurately estimate new contract operational costs could result in
delays in our contract performance, trigger service level penalties or result
in contracts whose profit margins did not meet our expectations or our
historical profit margins. Failure to properly integrate acquired operations
could result in increased cost. As a result of any of these problems associated
with expansion, our business, financial condition, and results of operations
could be materially and adversely affected. Government clients  termination rights, audits and investigations. A
substantial portion of our revenues are derived from contracts with state and
local governments and from contracts with the Department of Education.
Governments and their agencies may terminate most of these contracts at any
time, without cause. Also, our Department of Education 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
condition, results of operations and cash flow. Further, the negative publicity
that arises from findings in such audits, investigations or the penalties or
sanctions therefore could have an adverse effect on our reputation in the
industry and reduce our ability to compete for new contracts and may also have
a material adverse effect on our business, financial condition, results of
operations 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
clients may seek damages as permitted under the contract and/or 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. 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. Rapid technological changes. The markets for our information technology
services are subject to rapid technological changes and 21




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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. Federal and State laws relating to individually identifiable information. We
process and store information relating to identifiable individuals, both in our
role as a service provider and as an employer. As a result, we are subject to
numerous Federal and State laws and regulations designed to protect
individually identifiable information, including financial and health
information. For example, in 1996, Congress passed the Health Insurance
Portability and Accountability Act and as required therein, the Department of
Health and Human Services established regulations governing, among other
things, the privacy, security and electronic transmission of individually
identifiable health information. We have taken measures to comply with each of
those regulations on or before the required dates. Other Federal and State laws
apply to the processing of individually identifiable information as well, and
additional legislation may be enacted at any time. Failure to comply with
these types of laws may subject us to liability for monetary damages, fines
and/or criminal prosecution and may have a material adverse effect on our
profitability and cash flow. Budget deficits at, or fluctuations in the number of requests for proposals
issued by, 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. Also, the
number of requests for proposals issued by state and local government agencies
is subject to fluctuation. While this has not had a material adverse impact on
our results of operations through the first quarter of fiscal year 2005, 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
and have also contemplated the acquisition of companies formed and operating in
foreign countries. We have approximately 12,000 employees in Mexico, Guatemala,
India, Ghana, Jamaica, Dominican Republic, Spain, Malaysia, Ireland, Germany
and China, as well as several other countries, that support our commercial
business process outsourcing services. International operations and
acquisitions are subject to a number of risks including, but not limited to the
following: fluctuations in foreign currency exchange rates; licensing and labor
counsel requirements; staffing key managerial positions; cultural differences;
integration of companies, their management, and operations, which are located
in distant locations; data privacy laws adopted by various countries in which
we do 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, results of operations and
prospects. Servicing Risks. We service (for various lenders and under various service
agreements) a portfolio of approximately $19.2 billion of loans made under the
Federal Family 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. 22




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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 are exposed to market risk from changes in interest rates and foreign
currency exchange rates. There have been no material changes in our market
risk from June 30, 2004. For further information regarding our market risk,
refer to our Annual Report on Form 10-K for the fiscal year ended June 30,
2004. 
 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, 2004. Based on such
evaluation, the Companys principal executive officer and principal financial
officer have concluded that such disclosure controls and procedures were
operating effectively as of September 30, 2004. 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, 2004 that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting. 23




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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 former 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 them 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 included
attorneys fees and pre-judgment interest. The judgment was appealed by the
former employees and us. As a result of the appeals, the trial courts
judgment was reversed and the case was remanded to the trial court for further
proceedings, except that the trial court judgment was affirmed in part as to
one of the former employees and the trial courts dismissal of certain of our
affirmative defenses was upheld. The amount of the judgment for the one former
employee whose judgment was upheld has been settled for $1.3 million. In
August 2004, mediation was conducted which resulted in the settlement of claims
of the other former employees. As a result of this settlement, we accrued $10
million in other operating expenses in the fourth quarter of fiscal year 2004
related to this settlement and paid $10 million in full settlement of all
claims of the other former employees in August 2004. One of our subsidiaries, ACS Defense, LLC, 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 (DOJ). 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 DOJs inquiry was approximately $17.2 million for the fiscal year ended
June 30, 2004, representing approximately 0.4% of our revenue for fiscal year
2004. In February 2004, we sold the contracts associated with the Hanscom Air
Force Base relationship to ManTech International Corporation; however, we have
agreed to indemnify ManTech with respect to this DOJ investigation. We are
continuing our previously announced internal investigation of this matter
through outside legal counsel and we are continuing to cooperate with the DOJ
in producing documents in response to the subpoena. At this stage of this
inquiry, we are unable to express an opinion as to its likely outcome. Another of our subsidiaries, ACS State & Local Solutions, Inc. (ACS SLS), 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
DOJ. The inquiry concerns the teaming arrangements between ACS SLS and Tier on
child support payment processing contracts awarded to ACS SLS, and Tier as a
subcontractor to ACS SLS, in New York, Illinois and Ohio. Effective June 30,
2004, Tier was no longer a subcontractor to us in Ohio. Our
revenue from the contracts for which Tier was a subcontractor was
approximately $67 million in fiscal year 2004 and approximately $10.2 million
in the first quarter of fiscal year 2005, representing approximately 1.6% and
1.0% of our fiscal year 2004 and first quarter fiscal year 2005 revenues,
respectively. Our teaming arrangement also contemplated the California child
support payment processing request for proposals, which was issued in late
2003; however, we did not enter into a teaming agreement with Tier for the
California request for proposals. Based on Tiers recent filings with the
Securities and Exchange Commission, we understand that on November 20, 2003 the
DOJ granted conditional amnesty to Tier in connection with this inquiry
pursuant to the DOJs Corporate Leniency Policy. The policy provides that the
DOJ will not bring any criminal charges against Tier as long as it continues to
fully cooperate in the inquiry (and makes restitution payments if it is
determined that parties were injured as a result of impermissible
anticompetitive conduct). We are continuing our previously announced internal
investigation of this matter through outside legal counsel and we are
continuing to cooperate with the DOJ in producing documents in response to the
subpoena. At this stage of this inquiry, we are unable to express an opinion
as to its likely outcome. On January 30, 2004, the Florida Agency for Workforce Innovations (AWI)
Office of Inspector General (OIG) issued a report that reviewed 13 Florida
workforce regions, including Dade and Monroe counties, and noted concerns
related to the accuracy of customer case records maintained by our local staff.
Our total revenue generated from the Florida workforce services amounts to
approximately 1% of our total fiscal year 2004 revenue. In March 2004, we
filed our response to the OIG report. On May 20, 2004, at a meeting of the
Workforce Florida, Inc. (WFI) Board of Directors which was attended by
representatives of ACS SLS, which is our subsidiary performing these services,
a representative of WFI, which is the principal workforce policy organization
for the State of Florida and oversees and monitors the administration of the
States workforce policy as well as the programs and services carried out by
regional workforce boards and AWI, indicated that WFI did not see a systemic
problem with the performance of these workforce services by ACS SLS and that it
considered the issue closed. There were also certain contract billing issues that arose
during the course of our performance of our workforce contract in Dade County, which ended in June 2003. However, during the first quarter of fiscal year 2005,
we settled all financial issues with Dade County with respect to our workforce contract with that county and the settlement is fully reflected in our results of
operations for the first quarter of fiscal year 2005. We were also advised in February 2004 that the
SEC is conducting an informal investigation into the matters covered by the
OIGs report. On March 22, 2004, ACS SLS received a grand jury document
subpoena issued by the U.S. District Court for the Southern District of
Florida. The 24




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subpoena was issued in connection with an inquiry being conducted
by the DOJ and the Inspector Generals Office of the U.S. Department of Labor
(DOL) into the subsidiarys workforce contracts in Dade and Monroe counties
in Florida, which expired in June 2003, and which were included in the
OIGs report.  On August 25, 2004, ACS SLS received a
grand jury document subpoena issued by the U.S. District Court for the Middle
District of Florida in connection with an inquiry being conducted by the DOJ
and the Inspector Generals Office of the DOL. The subpoena relates to a
contract in Pinellas County in Florida for the period from January 1999 to the
contracts expiration in March 2001, which was prior to our acquisition of this
business from Lockheed Martin Corporation in August 2001. Further, we settled
a civil lawsuit with Pinellas County in December 2003 with respect to claims
related to the services rendered to Pinellas County by Lockheed Martin
Corporation prior to our acquisition of ACS SLS (those claims having been
transferred with ACS SLS as part of the acquisition), and which settlement
resulted in Pinellas County paying ACS SLS an additional $600,000. We are
continuing our internal investigation of these matters through outside legal
counsel and we are continuing to cooperate with the DOJ, the SEC and DOL to
produce documents in connection with their investigations. At this stage of
these investigations, we are unable to express an opinion as to their likely
outcome. We anticipate that we may receive additional subpoenas for information
in other Florida Workforce regions as a result of the AWI report issued in
January 2004. In June 2004, the Mississippi Department of Environmental Quality (MDEQ)
issued a Notice of Violation to ACS Image Solutions, Inc., one of our
subsidiaries, that alleged noncompliance with the Clean Water Act and the
Federal Resource Conservation and Recovery Act. On September 20, 2004, we
agreed to settle this matter with the MDEQ for $150,000. We have closed the
specific operation whose activities resulted in this Notice. 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 other
proceedings, we do not believe these other actions, in the aggregate, will have
a material adverse effect on our financial position, results of operations or
liquidity. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Our Board of Directors has authorized two share repurchase programs totaling
$1.25 billion of our Class A common stock. 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 and on April 29, 2004, we announced that
our Board of Directors authorized a new, incremental share repurchase program
of up to $750 million of our Class A common stock. The programs, which are
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 on hand, cash flow
from operations, and borrowings under our Credit Facility. As of September
30, 2004, we had repurchased approximately 15 million shares at a total cost of
approximately $743.2 million; however, we did not repurchase any shares in the
first quarter of fiscal year 2005. As of September 30, 2004,
there remained approximately $506.8 million authorized under our share
repurchase programs. Through November 3, 2004, on a trade date basis, we have
repurchased 15.2 million shares at a total cost of approximately $753.9
million. 25




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our 2004 Annual Meeting of Stockholders held on October 28, 2004, the
following actions were taken: 1. The following Directors were elected for terms of office expiring in 2005: Name
    
    For
    
    WithheldDarwin Deason
    
    
    166,228,418
    
    
    
    3,714,952Jeffrey A. Rich
    
    
    167,047,189
    
    
    
    2,896,181Mark A. King
    
    
    165,483,160
    
    
    
    4,460,210Joseph P. ONeill
    
    
    167,926,056
    
    
    
    2,017,314Frank A. Rossi
    
    
    167,918,836
    
    
    
    2,024,534J. Livingston Kosberg
    
    
    167,920,647
    
    
    
    2,022,723Dennis McCuistion
    
    
    167,944,202
    
    
    
    1,999,168
 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 164,894,545 votes in favor of this proposal and 4,202,525
votes were cast against this proposal. There were 845,900 abstentions and 400
broker non-votes. 3. A proposal by the Board of Directors to ratify the appointment of
PricewaterhouseCoopers LLP as our independent registered public accounting firm
for fiscal year 2005 was approved by the stockholders. The stockholders cast
168,166,208 votes in favor of the proposal and 1,037,953 votes against the
proposal. There were 739,209 abstentions. 
 ITEM 6. EXHIBITS  a.)
    
    ExhibitsReference is made to the Index to Exhibits beginning on page 28 for a list
of all exhibits filed as part of this report. 26




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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 9th day of November, 2004. AFFILIATED COMPUTER SERVICES, INC.By:
    
    /s/ Warren D. EdwardsWarren D. Edwards
Executive Vice President and
Chief Financial Officer
 27




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INDEX TO EXHIBITS ExhibitNumber
    
    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 September 11,
2003 (filed as Exhibit 3.3 to our Quarterly Report on Form 10-Q,
filed February 17, 2004 and incorporated herein by reference).4.1
    
    Form of New Class A Common Stock Certificate (filed as Exhibit
4.3 to our Registration Statement on Form S-1, filed May 26,
1994, File No. 33-79394 and incorporated herein by reference).4.2
    
    Amended and Restated Rights Agreement, dated April 2, 1999,
between 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
    
    Amendment No. 1 to 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).4.4
    
    Form of Rights Certificate (included as Exhibit A to the Amended
and Restated Rights Agreement (Exhibit 4.2)).10.1
    
    Form of Severance Agreement, each dated as of March 1, 2004
except as otherwise noted, by and between Affiliated Computer
Services, Inc. and each of Jeffrey A. Rich, Mark A. King, Warren
D. Edwards, Lynn Blodgett, Harvey Braswell (September 14, 2004),
John Brophy and William L. Deckelman, Jr. (filed as Exhibit 10.1
to our Quarterly Report on Form 10-Q, filed May 17, 2004 and
incorporated herein by reference).10.2
    
    Five Year Competitive Advance and Revolving Credit Facility
Agreement, dated as of October 27, 2004, by and among Affiliated
Computer Services, Inc., other Borrowers from time to time party
thereto, the Lender Parties from time to time party thereto,
JPMorgan Chase Bank, as Administrative Agent, Wells Fargo Bank,
National Association, as Syndication Agent, and others (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed October
29, 2004 and incorporated herein by reference).10.3
    
    Guaranty, dated as of October 27, 2004, by Affiliated Computer
Services, Inc. for the benefit of JPMorgan Chase Bank, as
Administrative Agent for the benefit of the Lender Parties
(filed as Exhibit 10.2 to our Current Report on Form 8-K, filed
October 29, 2004 and incorporated herein by reference).31.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.32.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 * Filed herewith 28