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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C.
20549
 FORM 10-Q (Mark One) þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended       December 31, 2004 OR oTRANSITION 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 2828 North Haskell, Dallas, Texas
    
    75204(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (214) 841-6111 Not Applicable 
  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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date. Number of shares outstanding as ofTitle of each class
    

February 3, 2005Class A Common Stock, $.01 par value
    
    
    120,069,748Class B Common Stock, $.01 par value
    
    
    6,599,372126,669,120




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES INDEX PAGENUMBERPART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements:Consolidated Balance Sheets at December 31, 2004 and June 30, 2004
    
    
    1Consolidated Statements of Income for the Three and Six Months Ended December 31, 2004 and 2003
    
    
    2Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    4  12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13  28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29  30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31Form of Amendment No. 1 to Severance AgreementSeverance AgreementCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)




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PART I 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 December 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,866
    
    
    $
    76,899Accounts receivable, net
    
    
    844,609
    
    
    
    873,471Prepaid expenses and other current assets
    
    
    102,272
    
    
    
    94,054Total current assets
    
    
    982,747
    
    
    
    1,044,424Property, equipment and software, net
    
    
    562,273
    
    
    
    521,772Goodwill
    
    
    2,039,786
    
    
    
    1,969,326Other intangibles, net
    
    
    296,362
    
    
    
    283,767Other assets
    
    
    83,473
    
    
    
    87,953Total assets
    
    $
    3,964,641
    
    
    $
    3,907,242LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    64,437
    
    
    $
    61,749Accrued compensation and benefits
    
    
    83,669
    
    
    
    133,530Other accrued liabilities
    
    
    287,616
    
    
    
    342,648Income taxes payable
    
    
    30,705
    
    
    
    10,628Deferred taxes
    
    
    37,111
    
    
    
    25,426Current portion of long-term debt
    
    
    4,953
    
    
    
    2,048Current portion of unearned revenue
    
    
    58,406
    
    
    
    61,541Total current liabilities
    
    
    566,897
    
    
    
    637,570Long-term debt
    
    
    254,950
    
    
    
    372,439Deferred taxes
    
    
    239,711
    
    
    
    234,183Other long-term liabilities
    
    
    87,140
    
    
    
    72,563Total liabilities
    
    
    1,148,698
    
    
    
    1,316,755Commitments and contingencies (See Note 10)Stockholders equity:Class A common stock
    
    
    1,371
    
    
    
    1,360Class B common stock
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,763,472
    
    
    
    1,730,783Accumulated other comprehensive income (loss), net
    
    
    1,230
    
    
    
    (3,381
    )Retained earnings
    
    
    1,790,554
    
    
    
    1,600,252Treasury stock at cost, 14,922 and 14,900 shares, respectively
    
    
    (740,750
    )
    
    
    (738,593
    )Total stockholders equity
    
    
    2,815,943
    
    
    
    2,590,487Total liabilities and stockholders equity
    
    $
    3,964,641
    
    
    $
    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 Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues


    $
    1,027,286
    
    
    $
    997,879
    
    
    $
    2,073,468
    
    
    $
    2,034,514Expenses:Wages and benefits
    
    
    435,970
    
    
    
    443,555
    
    
    
    867,818
    
    
    
    920,667Services and supplies
    
    
    251,006
    
    
    
    271,962
    
    
    
    526,068
    
    
    
    536,926Rent, lease and maintenance
    
    
    121,124
    
    
    
    96,920
    
    
    
    240,117
    
    
    
    192,850Depreciation and amortization
    
    
    55,586
    
    
    
    42,216
    
    
    
    109,905
    
    
    
    83,627Gain on sale of business
    
    
    
    
    
    
    (284,346
    )
    
    
    
    
    
    
    (284,346
    )Other operating expenses
    
    
    8,676
    
    
    
    24,591
    
    
    
    19,595
    
    
    
    37,880Total operating expenses
    
    
    872,362
    
    
    
    594,898
    
    
    
    1,763,503
    
    
    
    1,487,604Operating income
    
    
    154,924
    
    
    
    402,981
    
    
    
    309,965
    
    
    
    546,910Interest expense
    
    
    2,869
    
    
    
    5,325
    
    
    
    6,824
    
    
    
    10,545Other non-operating income, net
    
    
    (1,776
    )
    
    
    (988
    )
    
    
    (1,342
    )
    
    
    (1,168
    )Pretax profit
    
    
    153,831
    
    
    
    398,644
    
    
    
    304,483
    
    
    
    537,533Income tax expense
    
    
    57,686
    
    
    
    145,614
    
    
    
    114,181
    
    
    
    197,695Net income
    
    $
    96,145
    
    
    $
    253,030
    
    
    $
    190,302
    
    
    $
    339,838Earnings per share:Basic
    
    $
    0.75
    
    
    $
    1.93
    
    
    $
    1.48
    
    
    $
    2.57Diluted
    
    $
    0.73
    
    
    $
    1.80
    
    
    $
    1.45
    
    
    $
    2.41Shares used in computing earnings per share:Basic
    
    
    128,619
    
    
    
    131,001
    
    
    
    128,283
    
    
    
    132,087Diluted
    
    
    131,933
    
    
    
    141,880
    
    
    
    131,501
    
    
    
    142,889
 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)
 Six Months EndedDecember 31,2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    190,302
    
    
    $
    339,838Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    109,905
    
    
    
    83,627Tax benefit on stock options
    
    
    14,389
    
    
    
    8,113Deferred income tax expense
    
    
    43,813
    
    
    
    36,528Gain on sale of business
    
    
    
    
    
    
    (284,346
    )Other non-cash activities
    
    
    5,956
    
    
    
    10,553Changes in assets and liabilities, net of effects from acquisitions:(Increase) decrease in accounts receivable
    
    
    37,827
    
    
    
    (123,770
    )Increase in prepaid expenses and other current assets
    
    
    (8,493
    )
    
    
    (10,149
    )(Increase) decrease in other assets
    
    
    6,599
    
    
    
    (14,328
    )Decrease in accounts payable
    
    
    (1,195
    )
    
    
    (2,170
    )Decrease in accrued compensation and benefits
    
    
    (53,342
    )
    
    
    (18,250
    )Increase (decrease) in other accrued liabilities
    
    
    (67,222
    )
    
    
    71,209Increase in income taxes payable
    
    
    19,621
    
    
    
    97,536Increase (decrease) in unearned revenue
    
    
    (1,253
    )
    
    
    9,198Increase in other long-term liabilities
    
    
    2,367
    
    
    
    7,514Total adjustments
    
    
    108,972
    
    
    
    (128,735
    )Net cash provided by operating activities
    
    
    299,274
    
    
    
    211,103Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (106,553
    )
    
    
    (93,144
    )Payments for acquisitions, net of cash acquired
    
    
    (95,838
    )
    
    
    (112,451
    )Proceeds from divestitures, net of transaction costs
    
    
    (8
    )
    
    
    584,627Additions to other intangible assets
    
    
    (24,925
    )
    
    
    (14,851
    )Purchases of investments
    
    
    (4,587
    )
    
    
    Additions to notes receivable
    
    
    
    
    
    
    (2,681
    )Proceeds received on notes receivable
    
    
    425
    
    
    
    3,072Other
    
    
    46
    
    
    
    23Net cash provided by (used in) investing activities
    
    
    (231,440
    )
    
    

    364,595Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    865,472
    
    
    
    521,055Repayments of long-term debt
    
    
    (992,002
    )
    
    
    (703,733
    )Purchase of treasury shares
    
    
    (14,849
    )
    
    
    (209,239
    )Proceeds from issuance of treasury shares
    
    
    13,917
    
    
    
    Proceeds from stock options exercised
    
    
    18,595
    
    
    
    10,655Other
    
    
    
    
    
    
    (1,354
    )Net cash used in financing activities
    
    
    (108,867
    )
    
    
    (382,616
    )Net increase (decrease) in cash and cash equivalents
    
    
    (41,033
    )
    
    
    193,082Cash and cash equivalents at beginning of period
    
    
    76,899
    
    
    
    51,170Cash and cash equivalents at end of period
    
    $
    35,866
    
    
    $
    244,252
 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 approximately
47,000 people providing business process and information 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 Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net IncomeAs reported
    
    $
    96,145
    
    
    $
    253,030
    
    
    $
    190,302
    
    
    $
    339,838Less: Pro forma
employee compensation
cost of stock-based compensation plans, net of income tax
    
    
    5,749
    
    
    
    5,051
    
    
    
    11,315
    
    
    
    9,857Pro forma
    
    $
    90,396
    
    
    $
    247,979
    
    
    $
    178,987
    
    
    $
    329,981Basic earnings per shareAs reported
    
    $
    0.75
    
    
    $
    1.93
    
    
    $
    1.48
    
    
    $
    2.57Pro forma
    
    $
    0.70
    
    
    $
    1.89
    
    
    $
    1.40
    
    
    $
    2.50Diluted earnings per shareAs reported
    
    $
    0.73
    
    
    $
    1.80
    
    
    $
    1.45
    
    
    $
    2.41Pro forma
    
    $
    0.69
    
    
    $
    1.77
    
    
    $
    1.37
    
    
    $
    2.35
 On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R)
will require companies to measure all employee stock-based compensation awards using a fair
value method and recognize compensation cost in its financial statements. SFAS 123(R) is
effective beginning as of the first interim or annual reporting period beginning after June 15,
2005. We will be required to adopt SFAS 123(R) beginning July 1, 2005 for new awards of
stock-based compensation granted after that date and for unvested awards outstanding at that
date. We are in the process of determining the impact of the requirements of SFAS 123(R). 4




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 3. 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 a syndication of 19 other lenders
(the Credit Facility). Proceeds from advances under the Credit Facility will 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 dollars,
Euros or competitive loans in any currency). Multi-currency commitments (available in certain
specified currencies other than US dollars 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.
Subject to affirmation of representations and warranties, status of no default and commitments
by willing lenders, the Credit Facility may be increased by up to an additional $300 million.
The lending commitments under the Credit Facility are scheduled to terminate October 27, 2009.
The terms and rates of the Credit Facility are generally more favorable than those of the Prior
Facility (defined below). 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 Base Rate (generally equal to the prime rate of JP Morgan) or a Eurocurrency rate
plus a percentage (ranging from .220% to .775%, currently .39%) determined based on our credit
rating. We are required to pay accrued interest at established intervals based upon our elected
interest period. 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, we terminated our then
existing $875 million revolving credit facility (the Prior Facility) on October 27, 2004 and
repaid the $316 million outstanding on the Prior Facility with borrowings under the Credit
Facility. The lending commitments under the Prior Facility were evidenced by that certain
Revolving Credit Agreement, dated as of September 12, 2002 among us, Wells Fargo Bank Texas,
National Association, as administrative agent, and various other lenders, and were scheduled to
expire in December 2005. At December 31, 2004, we had approximately $1.2 billion available on our Credit Facility after
giving effect to outstanding indebtedness and $97.2 million of outstanding letters of credit
that secure certain contractual performance and other obligations and which reduce the
availability of our Credit Facility. At December 31, 2004, we had $251.6 million outstanding on
our Credit Facility, which is reflected in long-term debt, and which bore interest at 2.92% for
substantially all of the amount outstanding. 4. 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 up to $17 million maximum based upon future financial performance, and was funded from borrowings under
our Prior Facility 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 5




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 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 $61 million was paid to former
BlueStar shareholders by December 31, 2004 and was funded from borrowings under our credit
facilities and cash on hand. The remaining purchase price of $6 million will be paid in the
first quarter of fiscal year 2006. 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 $38.3
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 December 31, 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. We also completed two other acquisitions in our government segment during the six months ended
December 31, 2004. These acquisitions are not considered material to our results of operations, either individually
or in the aggregate; therefore, no pro forma information is presented. 5. 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. As of December 31,
2004, we had repurchased approximately 15.3 million shares at a total cost of approximately $758
million and reissued 0.3 million shares for proceeds totaling
$17.3 million to fund contributions to our employee stock
purchase plan and 401(k) plan. As of December 31,
2004, there remained approximately $492 million authorized under our share repurchase programs. In
order to conform our stock option program with standard market practice, on February 2, 2005, our
Board of Directors approved an amendment to stock options previously granted that did not become
exercisable until five years from the date of grant to provide that such options become
exercisable on the day they vest. Options granted under both our 1997 Stock Incentive Plan and
our 1988 Stock Option Plan generally vest in varying increments over a five year period. It is
expected that future option grants will contain matching vesting and exercise schedules. This
amendment does not amend or affect the vesting schedule, exercise price, quantity of options
granted, shares into which such options are exercisable or life of any award under any
outstanding option grant. Therefore, no compensation expense is required. 6




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 6. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the six months ended December 31, 2004 are as
follows (in thousands): Government
    
    
    Commercial
    
    
    TotalBalance as of June 30, 2004
    
    $
    1,082,536
    
    
    $
    886,790
    
    
    $
    1,969,326Acquisition activity
    
    
    27,888
    
    
    
    42,572
    
    
    
    70,460Balance as of December 31, 2004
    
    $
    1,110,424
    
    
    $
    929,362
    
    
    $
    2,039,786
 Goodwill activity for the six months ended December 31, 2004 was primarily due to the
acquisitions of Heritage and BlueStar (see Note 4) and contingent consideration due to former
shareholders of prior years acquisitions. Approximately $1.8 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): December 31, 2004
    
    
    June 30, 2004Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Acquired customer-related
intangibles
    
    $
    207,900
    
    
    $
    (62,325
    )
    

    $
    191,517
    
    
    $
    (49,425
    )Customer-related intangibles
    
    
    159,846
    
    
    
    (61,144
    )
    
    
    142,802
    
    
    
    (53,334
    )All other
    
    
    2,853
    
    
    
    (1,568
    )
    
    
    2,854
    
    
    
    (1,447
    )Total
    
    $
    370,599
    
    
    $
    (125,037
    )
    
    $
    337,173
    
    
    $
    (104,206
    )Unamortized intangible asset:Title plant
    
    $
    50,800
    
    
    
    
    
    
    $
    50,800
 Aggregate Amortization:For the quarter ended December 31, 2004
    
    $
    12,936For the quarter ended December 31, 2003
    
    
    10,234For the six months ended December 31, 2004
    
    
    27,252For the six months ended December 31, 2003
    
    
    20,097Estimated amortization for the years ended June 30,2005
    
    $
    50,5102006
    
    
    44,8932007
    
    
    40,1372008
    
    
    37,0362009
    
    
    31,194
 Amortization includes amounts charged to amortization expense for customer-related intangibles
and other intangibles, other than contract inducements. Amortization of contract inducements of
$3.2 million and $2.3 million for the three months ended December 31, 2004 and 2003,
respectively, and $6.2 million and $4.9 million for the six months ended December 31, 2004 and
2003, respectively, is recorded as a reduction of related contract revenue. Amortization
expense includes approximately $6.6 million and $5.1 million for acquired customer-related
intangibles for the three months ended December 31, 2004 and 2003, respectively, and $12.9
million and $9.3 million for the six months ended December 31, 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 approximately 6 years. 7




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), establishes standards for reporting and display of comprehensive income and its
components in financial statements. The objective of SFAS 130 is to report a measure of all
changes in equity of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes within a companys equity. The components of comprehensive income are as follows (in thousands): Three months ended
    
    
    Six Months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income
    
    $
    96,145
    
    
    $
    253,030
    
    
    $
    190,302
    
    
    $
    339,898Other comprehensive income (loss):Foreign currency translation
adjustment (net of income tax
effect of $2,300, $802, $2,767
and $79, respectively)
    
    
    3,833
    
    
    
    1,336
    
    
    
    4,611
    
    
    
    131Comprehensive income
    
    $
    99,978
    
    
    $
    254,366
    
    
    $
    194,913
    
    
    $
    340,029
 8. 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 Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator:Numerator for earnings per share (basic) -
Income available to common stockholders
    
    $
    96,145
    
    
    $
    253,030
    
    
    $
    190,302
    
    
    $
    339,838Effect of dilutive securities:Interest on 3.5% convertible debt, net of income tax
    
    
    
    
    
    
    2,055
    
    
    
    
    
    
    
    4,109Numerator for diluted earnings per share -
Income available to common stockholders
    
    $
    96,145
    
    
    $
    255,085
    
    
    $
    190,302
    
    
    $
    343,947Denominator:Weighted average shares outstanding (basic)
    
    
    128,619
    
    
    
    131,001
    
    
    
    128,283
    
    
    
    132,087Effect of dilutive securities:3.5% convertible debt
    
    
    
    
    
    
    7,298
    
    
    
    
    
    
    
    7,298Stock options
    
    
    3,314
    
    
    
    3,581
    
    
    
    3,218
    
    
    
    3,504Total potential common shares
    
    
    3,314
    
    
    
    10,879
    
    
    
    3,218
    
    
    
    10,802Denominator for earnings per share assuming dilution
    
    
    131,933
    
    
    
    141,880
    
    
    
    131,501
    
    
    
    142,889Earnings per share (basic)
    
    $
    0.75
    
    
    $
    1.93
    
    
    $
    1.48
    
    
    $
    2.57Earnings per share assuming dilution
    
    $
    0.73
    
    
    $
    1.80
    
    
    $
    1.45
    
    
    $
    2.41
 8




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 9. 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 December 31, 2004Revenues (a)
    
    $
    542,543
    
    
    $
    484,743
    
    
    $
    
    
    
    $
    1,027,286Operating expenses (excluding
depreciation and amortization)
    
    
    424,586
    
    
    
    379,503
    
    
    
    12,687
    
    
    
    816,776Depreciation and amortization
    
    
    20,487
    
    
    
    34,623
    
    
    
    476
    
    
    
    55,586Operating income
    
    $
    97,470
    
    
    $
    70,617
    
    
    $
    (13,163
    )
    
    $
    154,924Three months ended December 31, 2003Revenues (a)
    
    $
    600,611
    
    
    $
    397,268
    
    
    $
    
    
    
    $
    997,879Operating expenses (excluding
depreciation and amortization)
    
    
    516,149
    
    
    
    308,678
    
    
    
    12,201
    
    
    
    837,028Gain on sale of business
    
    
    (284,346
    )
    
    
    
    
    
    
    
    
    
    
    (284,346
    )Depreciation and amortization
    
    
    17,199
    
    
    
    24,492
    
    
    
    525
    
    
    
    42,216Operating income
    
    $
    351,609
    
    
    $
    64,098
    
    
    $
    (12,726
    )
    
    $
    402,981Six months ended December 31, 2004Revenues (a)
    
    $
    1,094,062
    
    
    $
    979,406
    
    
    $
    
    
    
    $
    2,073,468Operating expenses (excluding
depreciation and amortization)
    
    
    864,546
    
    
    
    764,272
    
    
    
    24,780
    
    
    
    1,653,598Depreciation and amortization
    
    
    39,962
    
    
    
    68,951
    
    
    
    992
    
    
    
    109,905Operating income
    
    $
    189,554
    
    
    $
    146,183
    
    
    $
    (25,772
    )
    
    $
    309,965Six months ended December 31, 2003Revenues (a)
    
    $
    1,297,394
    
    
    $
    737,120
    
    
    $
    
    
    
    $
    2,034,514Operating expenses (excluding
depreciation and amortization)
    
    
    1,091,795
    
    
    
    571,428
    
    
    
    25,100
    
    
    
    1,688,323Gain on sale of business
    
    
    (284,346
    )
    
    
    
    
    
    
    
    
    
    
    (284,346
    )Depreciation and amortization
    
    
    35,590
    
    
    
    46,941
    
    
    
    1,096
    
    
    
    83,627Operating income
    
    $
    454,355
    
    
    $
    118,751
    
    
    $
    (26,196
    )
    
    $
    546,910
   (a)
    
    Revenues in our Government segment include revenues from operations divested during
fiscal year 2004 of $67.7 million for the three months ended December 31, 2003, and $0.6
million and $245.2 million for the six months ended December 31, 2004 and 2003,
respectively. Revenues in our Commercial segment include revenues from operations divested
during fiscal year 2004 of $1.8 million and $6.9 million for the three and six months ended
December 31, 2003, respectively. 9




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 10. COMMITMENTS AND CONTINGENCIES 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 understand that the DOJ is continuing its
investigation, but we have no information as to when the DOJ will conclude this process. We
have cooperated with the DOJ in producing documents in response to the subpoena, and our
internal investigation and review of this matter through outside legal counsel will continue
through the conclusion of the DOJ investigatory process. We are unable to express an opinion as
to the likely outcome of this matter at this time. 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 $18.6 million for the six months ended
December 31, 2004, representing approximately 1.6% and 0.9% of our fiscal year 2004 and the
first six months of 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 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 understand that
the DOJ is continuing its investigation, but we have no information as to when the DOJ will
conclude this process. We have cooperated with the DOJ in producing documents in response to
the subpoena, and our internal investigation and review of this matter through outside legal
counsel will continue through the conclusion of the DOJ investigatory process. We are unable to
express an opinion as to the likely outcome of this matter at this time. 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 also 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 workforce 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 10




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Lockheed Martin Corporation prior to our acquisition of ACS SLS (those claims having been
transferred with ACS SLS as part of the acquisition), and the 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. 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 December 31, 2004, $288.2 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 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. In addition, we had approximately $12.5
million of letters of credit which secure our casualty insurance
programs. We believe that we have sufficient capacity in the surety markets and liquidity from our cash flow and our
Credit Facility to respond to future requests for proposals. We are obligated to make certain contingent payments to former shareholders of acquired entities
upon satisfaction of certain contractual criteria. As of December 31, 2004, the maximum
aggregate amount of the outstanding contingent obligations is approximately $87.1 million. Upon
satisfaction of the specified contractual criteria, any such payment would result primarily in a
corresponding increase in goodwill. During the first six months of fiscal year 2005, we paid
$0.4 million and accrued an additional $4 million, which was paid in January 2005, 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 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 December 31, 2004, other accrued liabilities includes a
reserve for these claims in an amount we believe to be adequate at this time. 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 December 31, 2004, we serviced a FFEL portfolio of approximately 1.6 million loans
with an outstanding principal balance of approximately $20 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.
As of December 31, 2004, other accrued liabilities includes a reserve
for these claims in an amount we believe to be adequate at this time. 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 April 2004, we were awarded a contract by the North Carolina Department of Health and Human
Services (DHHS) to replace and operate the North Carolina Medicaid Management Information
System (NCMMIS). Prior to DHHS award of the contract, our proposal was reviewed and
approved by the State of North Carolinas Information Technology Services group and the Federal
Center for Medicare and Medicaid Services. Two competitors protested the contract award. In
considering the protests, DHHS again reviewed our proposal and determined that our technical
solutions did, in fact, comply with all technical requirements and denied protests on June 3,
2004. Electronic Data Systems (EDS) protested the denial. On January 12, 2005, an
administrative law judge made a non-binding recommendation to sustain EDS protest of the
contract between us and the DHHS. The non-binding recommendation was issued to the North
Carolina State Chief Information Officer (CIO), Office of Technology Services, who will make
the final decision on the protest after DHHS, ACS, and EDS have each had an opportunity 11




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 to file exceptions and proposals and to present arguments to the CIO. Notwithstanding the
reviews, approvals, and decisions in awarding the contract and in considering the protests, the
administrative law judge based his recommendation on his assessment that our technical solution
did not fully comply with the DHHS technical standards for proposals. We intend to vigorously
pursue affirmation of DHHS contract award. DHHS has instructed us to continue performance of
our services under the contract. 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. 11. NEW ACCOUNTING PRONOUNCEMENTS Please refer to our discussion of SFAS 123(R) in Note 2. On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the
Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends received deduction for certain
dividends from controlled foreign corporations. FASB Staff Position 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 allows companies additional time beyond that provided in Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes to determine the impact of
the Act on its financial statements and provides guidance for the disclosure of the impact of
the Act on the financial statements. At June 30, 2004, cumulative undistributed earnings of
non-U.S. subsidiaries for which U.S. taxes have not been recorded totaled $16.8 million. This
incentive is available to us until June 30, 2006. The 85% dividends received deduction
is subject to a number of limitations, and we have not yet decided whether, or to what extent,
we might repatriate foreign earnings that have not yet been remitted to the U.S. We will
continue to monitor our international activities. 12. SUBSEQUENT EVENTS On January 27, 2005, we completed the acquisition of Superior Consultant Holdings Corporation
(Superior), acquiring all of the issued and outstanding shares of Superior by virtue of a cash
tender offer, which was completed on January 25, 2005, and subsequent short-form merger of ACS
Merger Corp. with and into Superior at a purchase price of $8.50 per share. Superior provides
information technology consulting and business process outsourcing services and solutions to the
healthcare industry. The transaction was valued at approximately $120.5 million (including
payment of approximately $106 million for issued and outstanding shares, options, and warrants
and additional amounts for debentures and other payments) plus related transaction costs and was
funded from borrowings under our Credit Facility. We believe this acquisition expands our
provider healthcare subject matter expertise, as well as providing experience with most major
hospital information systems and additional healthcare management talent. 12




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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 approximately 47,000 people providing business
process and information 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 December 31, 2004, we signed contracts with new clients and incremental
business with existing clients representing $226.8 million of annualized recurring revenue and $1.1
billion in total contract value. The Government segment contributed 25% of the new contract
signings (based on annual recurring revenues), including contracts with the New Jersey Department
of Human Services to serve as the health benefits coordinator of Medicaid Managed Care Programs
supporting New Jerseys Medicaid and the State Childrens Health Insurance programs. The
Commercial segment contributed 75% of the new contract signings (based on annual recurring
revenues), including contracts with Chubb Corporation to provided information technology
infrastructure and human resource services, and Symetra to provide information technology
infrastructure services and a range of cross-functional and business process outsourcing solutions.
While there are no third party standards or requirements governing the calculation of new business
signings, 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. While there are no third party standards or requirements governing
the calculation of total contract value, we define total contract value as the estimated total
revenues from contracts signed during the period and represents estimated total revenue over the
term of the contract, as measured under GAAP. 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 up
to $17 million maximum based
upon future financial performance, and was funded from borrowings under our Prior Facility 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 13




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BlueStar prior to the acquisition; therefore, the net purchase price was approximately $67.1
million. Of this amount, approximately $61 million was paid to former BlueStar shareholders by
December 31, 2004 and was funded from borrowings under our credit facilities and cash on hand. The
remaining purchase price of $6 million will be paid in the first quarter of fiscal year 2006. 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 $38.3 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 December 31, 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. In April 2004, we were awarded a contract by the North Carolina Department of Health and Human
Services (DHHS) to replace and operate the North Carolina Medicaid Management Information System
(NCMMIS). Prior to DHHS award of the contract, our proposal was reviewed and approved by the
State of North Carolinas Information Technology Services group and the Federal Center for Medicare
and Medicaid Services. Two competitors protested the contract award. In considering the protests,
DHHS again reviewed our proposal and determined that our technical solutions did, in fact, comply
with all technical requirements and denied protests on June 3, 2004. Electronic Data Systems
(EDS) protested the denial. On January 12, 2005, an administrative law judge made a non-binding
recommendation to sustain EDS protest of the contract between us and the DHHS. The non-binding
recommendation was issued to the North Carolina State Chief Information Officer (CIO), Office of
Technology Services, who will make the final decision on the protest after DHHS, ACS, and EDS have
each had an opportunity to file exceptions and proposals and to present arguments to the CIO.
Notwithstanding the reviews, approvals, and decisions in awarding the contract and in considering
the protests, the administrative law judge based his recommendation on his assessment that our
technical solution did not fully comply with the DHHS technical standards for proposals. We intend
to vigorously pursue affirmation of DHHS contract award. DHHS has instructed us to continue
performance of our services under the contract. In November 2003, we completed the sale of a majority of our Federal government business to
Lockheed Martin Corporation (the Divested Federal Business) for approximately $649.4 million,
which included a cash payment of $586.5 million at closing and $70 million payable pursuant to a
five-year non-compete agreement, less a working capital settlement of $7.1 million paid in the
third quarter of fiscal year 2004. Assets sold were approximately $346.8 million and liabilities
assumed by Lockheed Martin Corporation were approximately $67.9 million, both of which were
primarily in the Government segment. We recognized a pretax gain of $284.3 million ($181.7 million,
net of income tax) in the second quarter of fiscal year 2004. We incurred $9.8 million ($6.2
million, net of income tax) for compensation costs associated with former Federal employees, which
is reflected in wages and benefits in the second quarter of fiscal year 2004. As of September 30,
2003, we classified as held-for-sale those assets and liabilities related to that portion of our
Federal business we expected to dispose 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) and $1.9 million ($1.2 million, net of income tax)
in the first and second quarters of fiscal year 2004, respectively, related to those long-lived
assets sold. We also completed the sale of two other small contracts during fiscal year 2004.
Revenues in our Government segment include revenues from operations divested through June 30, 2004
(primarily the Divested Federal Business) of $67.7 million for the three months ended December 31,
2003, and $0.6 million and $245.2 million for the six months ended December 31, 2004 and 2003,
respectively. Revenues in our Commercial segment include revenues from operations divested as of
June 30, 2004 (primarily the Divested Federal Business) of $1.8 million and $6.9 million for the
three and six months ended December 31, 2003, respectively. The sale of the Divested Federal
Business to Lockheed Martin Corporation allows us to focus on our business process and information
technology outsourcing service offerings in the commercial, state and local, and Federal education
and healthcare markets. 14




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##### Table of Contents



In 2001, we were awarded a contract by the Georgia Department of Community Health (DCH) to
develop, implement and operate a system to administer health benefits to Georgia Medicaid
recipients as well as state government employees (the Georgia Contract). This system development
project was large and complex and anticipated the development of a system that would process both
Medicaid and state employee claims. The Medicaid phase of this project was implemented on April 1,
2003. Various disputes arose because of certain delays and operational issues that were encountered
in this phase. During the second quarter of fiscal year 2004, in connection with a settlement in
principle, we recorded a $6.7 million reduction in revenue resulting from the change in our
percentage-of-completion estimates primarily as a result of the termination of Phase II of the
contract, a charge of $2.6 million to services and supplies associated with the accrual of
wind-down costs associated with the termination of Phase II and an accrual of $10 million in other
operating expenses to be paid to DCH pursuant to the settlement which was paid in the first quarter
of fiscal year 2005. On July 21, 2004 we entered into a definitive settlement agreement with the
DCH to settle these disputes. The terms of the definitive settlement, which were substantially the
same as those announced in January 2004, include the $10 million payment by us to DCH; a payment by
DCH to us of $9 million in system development costs; escrow of $11.8 million paid by DCH, with $2.4
million of the escrowed funds to be paid to us upon completion of an agreed work plan ticket and
reprocessing of July 2003  June 2004 claims, and the remaining $9.4 million of escrowed funds to
be paid to us upon final certification of the system by the Center for Medicare/Medicaid Services,
the governing Federal regulatory agency; cancellation of Phase II of the contract; and an agreement
to settle outstanding operational invoices resulting in a payment to us of over $8.2 million and
approximately $7 million of reduction in such invoices. SUBSEQUENT EVENT On January 27, 2005, we completed the acquisition of Superior Consultant Holdings Corporation
(Superior), acquiring all of the issued and outstanding shares of Superior by virtue of a cash
tender offer, which was completed on January 25, 2005, and subsequent short-form merger of ACS
Merger Corp. with and into Superior at a purchase price of $8.50 per share. Superior provides
information technology consulting and business process outsourcing services and solutions to the
healthcare industry. The transaction was valued at approximately $120.5 million (including payment
of approximately $106 million for issued and outstanding shares, options, and warrants and
additional amounts for debentures and other payments) plus related transaction costs and was funded
from borrowings under our Credit Facility. We believe this acquisition expands our provider
healthcare subject matter expertise, as well as providing experience with most major hospital
information systems and additional healthcare management talent. 15




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##### Table of Contents



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 December 31,
    
    
    Six months ended December 31,2004
    
    
    2003
    
    
    $ Growth
    
    
    Growth %
    
    
    2004
    
    
    2003
    
    
    $ Growth
    
    
    Growth %ConsolidatedTotal Revenues
    
    $
    1,027,286
    
    
    $
    997,879
    
    
    $
    29,407
    
    
    
    3
    %
    
    $
    2,073,468
    
    
    $
    2,034,514
    
    
    $
    38,954
    
    
    
    2
    %Less: Divestitures (1)
    
    
    (21
    )
    
    
    (69,475
    )
    
    
    69,454
    
    
    
    
    
    
    
    (560
    )
    
    
    (252,121
    )
    
    
    251,561Adjusted
    
    $
    1,027,265
    
    
    $
    928,404
    
    
    $
    98,861
    
    
    
    11
    %
    
    $
    2,072,908
    
    
    $
    1,782,393
    
    
    $
    290,515
    
    
    
    16
    %Acquired revenues (2)
    
    $
    104,693
    
    
    $
    40,714
    
    
    $
    63,979
    
    
    
    7
    %
    
    $
    201,341
    
    
    $
    40,714
    
    
    $
    160,627
    
    
    
    9
    %Internal revenues
    
    
    922,572
    
    
    
    887,690
    
    
    
    34,882
    
    
    
    4
    %
    
    
    1,871,567
    
    
    
    1,741,679
    
    
    
    129,888
    
    
    
    7
    %Total
    
    $
    1,027,265
    
    
    $
    928,404
    
    
    $
    98,861
    
    
    
    11
    %
    
    $
    2,072,908
    
    
    $
    1,782,393
    
    
    $
    290,515
    
    
    
    16
    %GovernmentTotal Revenues
    
    $
    542,543
    
    
    $
    600,611
    
    
    $
    (58,068
    )
    
    
    (10
    )%
    
    $
    1,094,062
    
    
    $
    1,297,394
    
    
    $
    (203,332
    )
    
    
    (16
    )%Less: Divestitures (1)
    
    
    (21
    )
    
    
    (67,653
    )
    
    
    67,632
    
    
    
    
    
    
    
    (560
    )
    
    
    (245,205
    )
    
    
    244,645Adjusted
    
    $
    542,522
    
    
    $
    532,958
    
    
    $
    9,564
    
    
    
    2
    %
    
    $
    1,093,502
    
    
    $
    1,052,189
    
    
    $
    41,313
    
    
    
    4
    %Acquired revenues (2)
    
    $
    10,228
    
    
    $
    
    
    
    $
    10,228
    
    
    
    2
    %
    
    $
    20,744
    
    
    $
    
    
    
    $
    20,744
    
    
    
    2
    %Internal revenues
    
    
    532,294
    
    
    
    532,958
    
    
    
    (664
    )
    
    
    
    
    
    
    1,072,758
    
    
    
    1,052,189
    
    
    
    20,569
    
    
    
    2
    %Total
    
    $
    542,522
    
    
    $
    532,958
    
    
    $
    9,564
    
    
    
    2
    %
    
    $
    1,093,502
    
    
    $
    1,052,189
    
    
    $
    41,313
    
    
    
    4
    %CommercialTotal Revenues
    
    $
    484,743
    
    
    $
    397,268
    
    
    $
    87,475
    
    
    
    22
    %
    
    $
    979,406
    
    
    $
    737,120
    
    
    $
    242,286
    
    
    
    33
    %Less: Divestitures (1)
    
    
    
    
    
    
    (1,822
    )
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    (6,916
    )
    
    
    6,916Adjusted
    
    $
    484,743
    
    
    $
    395,446
    
    
    $
    89,297
    
    
    
    23
    %
    
    $
    979,406
    
    
    $
    730,204
    
    
    $
    249,202
    
    
    
    34
    %Acquired revenues (2)
    
    $
    94,465
    
    
    $
    40,714
    
    
    $
    53,751
    
    
    
    14
    %
    
    $
    180,597
    
    
    $
    40,714
    
    
    $
    139,883
    
    
    
    19
    %Internal revenues
    
    
    390,278
    
    
    
    354,732
    
    
    
    35,546
    
    
    
    9
    %
    
    
    798,809
    
    
    
    689,490
    
    
    
    109,319
    
    
    
    15
    %Total
    
    $
    484,743
    
    
    $
    395,446
    
    
    $
    89,297
    
    
    
    23
    %
    
    $
    979,406
    
    
    $
    730,204
    
    
    $
    249,202
    
    
    
    34
    %
   (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. 16




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##### Table of Contents



RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of income as a
percentage of revenues: Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Wages and benefits
    
    
    42.4
    
    
    
    44.4
    
    
    
    41.9
    
    
    
    45.3Services and supplies
    
    
    24.4
    
    
    
    27.3
    
    
    
    25.4
    
    
    
    26.4Rent, lease and maintenance
    
    
    11.8
    
    
    
    9.7
    
    
    
    11.6
    
    
    
    9.5Depreciation and amortization
    
    
    5.4
    
    
    
    4.2
    
    
    
    5.3
    
    
    
    4.1Gain on sale of business
    
    
    
    
    
    
    (28.5
    )
    
    
    
    
    
    
    (14.0
    )Other operating expenses
    
    
    0.9
    
    
    
    2.5
    
    
    
    0.9
    
    
    
    1.8Total operating expenses
    
    
    84.9
    
    
    
    59.6
    
    
    
    85.1
    
    
    
    73.1Operating income
    
    
    15.1
    
    
    
    40.4
    
    
    
    14.9
    
    
    
    26.9Interest expense
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.3
    
    
    
    0.5Other non-operating income, net
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    0.0Pretax profit
    
    
    15.0
    
    
    
    39.9
    
    
    
    14.7
    
    
    
    26.4Income tax expense
    
    
    5.6
    
    
    
    14.5
    
    
    
    5.5
    
    
    
    9.7Net income
    
    
    9.4
    %
    
    
    25.4
    %
    
    
    9.2
    %
    
    
    16.7
    %
 COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2004 TO THE THREE MONTHS ENDED DECEMBER 31, 2003 Revenues In the second quarter of fiscal year 2005, our revenue increased $29.4 million, or 3%, to $1.027
billion from $997.9 million in the second quarter of fiscal year 2004. Revenues related to the
Divested Federal Business and other small contracts (collectively, the 2004 Divestitures) were
$69.5 million in the quarter ended December 31, 2003. Excluding the impact of the revenues related
to the 2004 Divestitures, revenues increased from $928.4 million in the second quarter of fiscal
year 2004 to $1.027 billion in the second quarter of fiscal year 2005, or 11%. Internal revenue
growth, excluding the impact of the revenues related to the 2004 Divestitures, for the second
quarter of fiscal year 2005 was 4%. The remainder of the revenue growth was related to
acquisitions. Internal revenue growth for the three months ended December 31, 2004 was adversely impacted by the
following items: (1) the terminations of the Gateway and Roadway contracts in our Commercial
segment, which together accounted for approximately $2 million and $18 million of revenue in the
three months ended December 31, 2004 and 2003, respectively. The Gateway contract was effectively
terminated during the first quarter of fiscal year 2005 as a result of Gateways acquisition of
eMachines, Inc., which significantly changed its business strategy. The Roadway contract was
terminated at the end of fiscal year 2004 due to Roadways acquisition by Yellow Freight; and (2)
HIPAA remediation work and our development work on the Georgia Contract in our Government segment,
which together accounted for approximately $1 million and $40 million of revenue in the three
months ended December 31, 2004 and 2003, respectively. Revenue in our Government segment, which represents 53% of consolidated revenue for the second
quarter of fiscal year 2005, decreased $58.1 million, or 10%, to $542.5 million in the second
quarter of fiscal year 2005 compared to the same period last year. Revenues related to the 2004
Divestitures included in the Government segment were $67.7 million for the quarter ended December
31, 2003. Excluding the impact of the revenues related to the 2004 Divestitures, total Government
segment revenues grew 2% in the second quarter of fiscal year 2005 to $542.5 million from $533
million in the second quarter of fiscal year 2004, all from acquisition growth. Internal revenue
growth was zero, with new revenues derived from our Department of Education, Texas Medicaid and
North Carolina Medicaid contracts offset by decreased revenue related to our development work on
the Georgia Contract and lower HIPAA revenues discussed above and lower revenues related to our
government unclaimed property business. 17




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##### Table of Contents



Revenue in our Commercial segment, which represents 47% of consolidated revenue for the second
quarter of fiscal year 2005, increased $87.5 million, or 22%, to $484.7 million in the second
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 $1.8 million in the second
quarter of fiscal year 2004. Excluding the impact of the revenues related to the Divested Federal
Business, revenues grew 23% in the second quarter of fiscal year 2005 compared to the same period
in fiscal year 2004. Revenue growth from acquisitions was 14% for the three months ended December
31, 2004. Internal revenue growth, excluding the impact of the revenues related to the Divested
Federal Business, was 9%, due primarily to increased revenue related to contracts with Nextel,
McDonalds, Hallmark, General Motors, University of Phoenix, General Electric and Goodyear. These
increases were primarily offset by lower revenue on the Roadway and Gateway contracts discussed
above and lower revenues in our commercial unclaimed property business. The contracts discussed
above collectively represent 76% of our internal revenue growth for the period in this segment. Operating Expenses Wages and benefits decreased $7.6 million, or 1.7%, to $436 million. As a percentage of revenue,
wages and benefits decreased 2% to 42.4% in the second quarter of fiscal year 2005 from 44.4% in
the same quarter of fiscal year 2004. Included in wages and benefits during the second quarter of
fiscal year 2004 are compensation costs associated with former Federal employees of $9.8 million,
which were primarily stay bonuses and accelerated option vesting due
to the sale of the Divested Federal Business. Excluding these
costs, wages and benefits increased $2.2 million, or 0.5%, in the second quarter of fiscal year
2005 (calculated as the $7.6 million decrease less $9.8 million compensation costs, divided by
reported second quarter fiscal year 2004 wages and benefits costs less the $9.8 million
compensation costs) and therefore was 42.4% as a percentage of revenue, a decrease of 1%. The
sale of the Divested Federal Business and the acquisition of Lockheed Martin Corporations
commercial information technology outsourcing business in the second quarter of fiscal year 2004
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 expense 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 Divested Federal Business
and our ongoing business process outsourcing operations. Services and supplies decreased $21 million, or 7.7%, to $251 million. As a percentage of revenue,
services and supplies decreased 2.9% to 24.4% in the second quarter of fiscal year 2005 from 27.3%
in the second quarter of fiscal year 2004. This decrease as a percentage of revenue is due to
several factors including the impact of the sale of the Divested Federal Business and lower revenue
in our unclaimed property business, which have a higher component of services and supplies than our
other ongoing operations; the $2.6 million of wind-down costs related to the termination of Phase
II of the Georgia Contract recorded in the second quarter of fiscal year 2004; and increased
revenue in our commercial business process outsourcing operations, which have a lower component of
services and supplies when compared to our other ongoing operations. The decrease as a percentage
of revenue was offset by increased subcontractor costs related to the new Common Services for
Borrowers contract with the Department of Education. Rent, lease and maintenance increased $24.2 million, or 25%, to $121.1 million. As a percentage of
revenue, rent, lease and maintenance increased to 11.8% in the second quarter of fiscal year 2005
from 9.7% in the second quarter of fiscal year 2004. This increase as a percentage of revenue was
primarily due to the impact of the sale of the Divested Federal Business in fiscal year 2004, which
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. Also contributing to the increase in rent, lease and maintenance was growth
in our information technology outsourcing business. Depreciation and amortization increased $13.4 million, or 31.7%, to $55.6 million. As a percentage
of revenue, depreciation and amortization increased 1.2%, to 5.4% due to capital expenditures and
additions to intangible assets necessary to support our new business, as well as the cessation of
$1.9 million of depreciation in the second 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. Other operating expense decreased $15.9 million, or 64.7%, to $8.7 million. As a percentage of
revenue, other operating expense decreased 1.6%, to 0.9%. The second quarter of fiscal year 2004
included a $10 million accrual for the settlement with the Georgia Department of Community Health. Interest expense Interest expense decreased $2.5 million in the second quarter of fiscal year 2005 compared to the
second quarter of fiscal year 2004, primarily as a result of the redemption of our 3.5%
Subordinated Convertible Notes in the third quarter of fiscal year 2004, which was partially offset
by increased interest expense resulting from an increase in the average balance outstanding on our
revolving credit facilities used to fund share repurchases and acquisitions. 18




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##### Table of Contents



Income tax expense Our effective tax rate increased to 37.5% in the second quarter of fiscal year 2005 from 36.5% in
the second quarter of fiscal year 2004 due to the 36.1% effective tax rate on the gain related to
the sale of our Divested Federal Business recorded in the second quarter of fiscal year 2004. Our
effective tax rate is higher than the 35% statutory rate due to the net effect of state income and
foreign income taxes. COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2004 TO THE SIX MONTHS ENDED DECEMBER 31, 2003 Revenues For the first six months of fiscal year 2005, our revenue increased $39 million, or 2%, to $2.073
billion from $2.035 billion for the first six months of fiscal year 2004. Revenues related to the
2004 Divestitures were $0.6 million and $252.1 million for the six months ended December 31, 2004
and 2003, respectively. Excluding the impact of the revenues related to the 2004 Divestitures,
revenues increased to $2.073 billion for the first six months of fiscal year 2005 from $1.782
billion for the first six months of fiscal year 2004, or 16%. Internal revenue growth, excluding
the impact of the revenues related to the 2004 Divestitures, for the first six months of fiscal
year 2005 was 7%. The remainder of the growth was related to acquisitions. Internal revenue growth for the six months ended December 31, 2004 was adversely impacted by the
following items: (1) the termination of the Roadway contract in our Commercial segment, which
accounted for approximately $1 million and $21 million of revenue in the six months ended December
31, 2004 and 2003, respectively. The Roadway contract was terminated at the end of fiscal year 2004
due to Roadways acquisition by Yellow Freight; and (2) HIPAA remediation work and our development
work on the Georgia Contract in our Government segment, which together accounted for approximately
$2 million and $76 million of revenue in the six months ended December 31, 2004 and 2003,
respectively. Revenue in our Government segment, which represents 53% of consolidated revenue for the first six
months of fiscal year 2005, decreased $203.3 million, or 16%, to $1.094 billion for the first six
months of fiscal year 2005 compared to the same period last year. Revenues related to the 2004
Divestitures included in the Government segment were $0.6 million and $245.2 million for the six
months ended December 31, 2004 and 2003, respectively. Excluding the impact of the revenues
related to the 2004 Divestitures, total Government segment revenues grew 4% for the first six
months of fiscal year 2005 to $1.094 billion from $1.052 billion for the first six months of fiscal
year 2004. Revenue growth from acquisitions was 2% for the six months ended December 31, 2004.
Internal revenue growth, excluding the impact of the revenues related to the 2004 Divestitures, was
2%, primarily due to increased revenues on the Texas Medicaid, Department of Education, North
Carolina Medicaid and New Jersey EZPass contracts, primarily offset by decreases related to the
development work on the Georgia Contract and lower HIPAA related revenues discussed above. The
contracts discussed above collectively represent 93% of our internal revenue growth for the period
in this segment. Revenue in our Commercial segment, which represents 47% of consolidated revenue for the first six
months of fiscal year 2005, increased $242.3 million, or 33%, to $979.4 million for the first six
months of fiscal year 2005 compared to the same period last year. Revenues related to the Divested
Federal Business included in the Commercial segment were $6.9 million for the first six months of
fiscal year 2004. Excluding the impact of the revenues related to the Divested Federal Business,
revenues grew 34% for the first six months of fiscal year 2005 compared to the same period in
fiscal year 2004. Revenue growth from acquisitions was 19% in the six months ended December 31,
2004. Internal revenue growth, excluding the impact of the revenues related to the Divested Federal
Business, was 15%, due primarily to increased revenues related to contracts with Nextel,
McDonalds, Goodyear, Hallmark, General Motors, University of Phoenix and General Electric, as well
as revenues related to the termination of our relationship with Gateway. These increases were
partially offset by the loss of the Roadway contract discussed above and lower revenues in our
commercial unclaimed property business. The contracts discussed above collectively represent 77%
of our internal revenue growth for the period in this segment. Operating Expenses Wages and benefits decreased $52.8 million, or 5.7%, to $867.8 million. As a percentage of
revenue, wages and benefits decreased 3.4% to 41.9% for the first six months of fiscal year 2005
from 45.3% in the same period of fiscal year 2004. Included in wages and benefits for the first
six months of fiscal year 2004 are compensation costs associated with former Federal employees of
$9.8 million, which were primarily stay bonuses and accelerated
option vesting due to the sale of the Divested Federal Business.
Excluding these costs, wages and benefits decreased $43 million, or 4.7%, for the first six months
of fiscal year 2005 (calculated as the $52.8 million decrease less $9.8 million compensation costs,
divided by reported wages and benefits costs for the six months ended December 31, 2003 less the
$9.8 million compensation costs) and therefore was 41.9% as a percentage of revenue, a decrease of
2.9%. The sale of the Divested Federal Business, the acquisition of Lockheed Martin Corporations
commercial information technology outsourcing business and the new Common Services for Borrowers
contract with the Department of Education 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 expense 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 Divested Federal Business and our ongoing business process outsourcing
operations. 19




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The new Common Services for Borrowers contract also has a lower component of wages of
benefits than our other operations due to the use of subcontractors. Services and supplies decreased $10.9 million, or 2.0%, to $526.1 million. As a percentage of
revenue, services and supplies decreased 1% to 25.4% for the first six months of fiscal year 2005
from 26.4% in the same period of fiscal year 2004. This decrease as a percentage of revenue is
primarily due to impact of the sale of the Divested Federal Business and lower revenue in our
commercial unclaimed property business, both of which had a higher component of services and
supplies than our other ongoing operations and the $2.6 million of wind-down costs related to the
termination of Phase II of the Georgia Contract recorded in the second quarter of fiscal year 2004.
This decrease was offset by the increased subcontractor costs related to the new Common Services
for Borrowers contract with the Department of Education. Rent, lease and maintenance increased $47.3 million, or 24.5%, to $240.1 million. As a percentage
of revenue, rent, lease and maintenance increased 2.1% to 11.6% for the first six months of fiscal
year 2005 from 9.5% in the same period 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. Also contributing to the increase in rent, lease and maintenance was growth in our
information technology outsourcing business. Depreciation and amortization increased $26.3 million, or 31.4%, to $109.9 million. As a
percentage of revenue, depreciation and amortization increased 1.2%, to 5.3% due to capital
expenditures and additions to intangible assets necessary to support our new business, as well as
the cessation of $6.2 million of depreciation in the first six months 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. Other operating expense decreased $18.3 million, or 48.3%, to $19.6 million. As a percentage of
revenue, other operating expense decreased 0.9%, to 0.9%. The first six months of fiscal year 2004
included a $10 million accrual for the settlement with the Georgia Department of Community Health. Interest expense Interest expense decreased $3.7 million the first six months of fiscal year 2005 compared to the
same period of fiscal year 2004, primarily as a result of the redemption of our 3.5% Subordinated
Convertible Notes in the third quarter of fiscal year 2004, partially offset by higher interest
expense resulting from an increase in the average balance outstanding on our revolving credit
facilities used to fund share repurchases and acquisitions. Income tax expense Our effective tax rate increased to 37.5% in the first six months of fiscal year 2005 from 36.8%
for the first six months of fiscal year 2004 due to the 36.1% effective tax rate on the gain
related to the sale of Divested Federal Business recorded in fiscal year 2004. 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 six months of fiscal year 2005, we generated approximately $299.3 million in cash
flow from operations compared to $211.1 million in the same period of fiscal year 2004. The
increase from the prior year period was primarily a result of increased net income (excluding the
gain on the sale of the Divested Federal Business and related income tax accrual) and increased
collections on accounts receivable, including the payment of operational and termination fees from
Gateway and timing of collections in our unclaimed property business. Additionally in the prior
year period, cash flows were adversely impacted by increased
receivables related to development work on our Georgia Contract, which was substantially completed in the third quarter of fiscal year 2004. We
collected billed amounts outstanding related to this development work in the first half of fiscal year 2005. The improvement in
accounts receivable was partially offset by
increased payments for accrued compensation due to the timing of employee benefit payments and
payments on our accrued liability balances, including the payment of a prior year legal settlement
of $10 million and the payment of the settlement on the Georgia Contract of $10 million, as well as
the timing of payments related to software used in our information technology outsourcing business,
transfer agent fees related to our unclaimed property business and other contract related costs. 20




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Free cash flow (as defined below) was approximately $167.8 million for the first six months of
fiscal year 2005 versus approximately $103.1 million for the same period of fiscal year 2004. Our
capital expenditures, defined as purchases of property, equipment and software, net, and additions
to other intangible assets, were approximately $131.5 million, or 6.3% of total revenues, and $108
million, or 5.3% of total revenues, for the six months ended December 31, 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): Six months endedDecember 31,2004
    
    
    2003Net cash provided by operating activities
    
    $
    299,274
    
    
    $
    211,103Purchases of property, equipment and software, net
    
    
    (106,553
    )
    
    
    (93,144
    )Additions to other intangible assets
    
    
    (24,925
    )
    
    
    (14,851
    )Free cash flow
    
    $
    167,796
    
    
    $
    103,108
 During the six months ended December 31, 2004, net cash used in investing activities was $231.4
million. We used $95.8 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 $131.5 million and
$108 million for the six months ended December 31, 2004 and 2003, respectively. During the first six months of fiscal year 2005, cash used by financing activities was $108.9
million. Such financing activities include net repayments of debt and purchases of treasury shares
offset by proceeds from stock options and proceeds from issuance of treasury shares to fund
employer contributions under our Employee Stock Purchase and 401(k) plans. 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 a syndication of 19 other lenders (the Credit
Facility). Proceeds from advances under the Credit Facility will 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 dollars, Euros or competitive loans
in any currency). Multi-currency commitments (available in certain specified currencies other than
US dollars 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. Subject to affirmation of
representations and warranties, status of no default and commitments by willing lenders, the Credit
Facility may be increased by up to an additional $300 million. The lending commitments under the
Credit Facility are scheduled to terminate October 27, 2009. The terms and rates of the Credit
Facility are generally more favorable than those of the Prior Facility (defined below). 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 Base Rate (generally equal to the prime rate of JP Morgan) or a Eurocurrency rate
plus a percentage (ranging from .220% to .775%, currently .39%) determined based on our credit
rating. We are required to pay accrued interest at established intervals based upon our elected
interest period. 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 21




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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, we terminated our then existing
$875 million revolving credit facility (the Prior Facility) on October 27, 2004 and repaid the
$316 million outstanding on the Prior Facility with borrowings under the Credit Facility. The
lending commitments under the Prior Facility were evidenced by that certain Revolving Credit
Agreement, dated as of September 12, 2002 among us, Wells Fargo Bank Texas, National Association, as
administrative agent, and various other lenders, and were scheduled to expire in December 2005. Draws made under our credit facilities are made to fund cash acquisitions, share repurchases and
for general working capital requirements. During the twelve months ending December 31, 2004, the
balance outstanding under our credit facilities for borrowings ranged from $0 to $443.9 million.
At December 31, 2004, we had approximately $1.2 billion available on our Credit Facility after
giving effect to outstanding indebtedness and $97.2 million of outstanding letters of credit that
secure certain contractual performance and other obligations and which reduce the availability of
our Credit Facility. At December 31, 2004, we had $251.6 million outstanding on our Credit
Facility, which is reflected in long-term debt and which bore interest at 2.92% for substantially
all of the amount outstanding. Subsequent to December 31, 2004, we borrowed additional funds for
our acquisition of Superior (discussed previously), as well as additional share repurchases, as
discussed below. 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 December 31, 2004, $288.2 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 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. In addition, we had approximately $12.5
million of letters of credit which secure our casualty insurance
programs. 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 December 31, 2004, we had cash and cash equivalents of $35.9 million compared to $76.9 million
at June 30, 2004. Our working capital (defined as current assets less current liabilities)
increased $9 million to $415.9 million at December 31, 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 December 31, 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 8.5% and 12.6% at December 31, 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 December 31, 2004, we had repurchased approximately 15.3 million shares at a total cost of
approximately $758 million and reissued 0.3 million shares
for proceeds totaling $17.3 million to fund contributions to our
employee stock purchase plan and 401(k) plan. As
of December 31, 2004, there remained approximately $492 million authorized under our share
repurchase programs. Through February 7, 2005, on a trade date basis, we have repurchased
approximately 17.4 million shares at a total cost of
approximately $874 million. In
order to conform our stock option program with standard market practice, on February 2, 2005, our Board
of Directors approved an amendment to stock options previously granted that did not become
exercisable until five years from the date of grant to provide that such options become exercisable
on the day they vest. Options granted under both our 1997 Stock Incentive Plan and our 1988 Stock
Option Plan generally vest in varying increments over a five year period. It is expected that
future option grants will contain matching vesting and exercise schedules. This amendment does not
amend or affect the vesting schedule, exercise price, quantity of options granted, shares into
which such options are exercisable or life of any award under any outstanding option grant.
Therefore, no compensation expense is required. We believe 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. 22




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DISCLOSURES
ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS


  AS OF DECEMBER 31, 2004 (IN THOUSANDS): Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsLong-term debt
    
    $
    253,539
    
    
    $
    1,289
    
    
    $
    650
    
    
    $
    251,600
    
    
    $
    Capital lease obligations
    
    
    6,364
    
    
    
    3,664
    
    
    
    2,700
    
    
    
    
    
    
    
    Operating leases
    
    
    522,817
    
    
    
    167,397
    
    
    
    192,298
    
    
    
    81,606
    
    
    
    81,516Purchase obligations
    
    
    30,050
    
    
    
    8,878
    
    
    
    17,777
    
    
    
    3,395
    
    
    
    Total Contractual Cash Obligations
    
    $
    812,770
    
    
    $
    181,228
    
    
    $
    213,425
    
    
    $
    336,601
    
    
    $
    81,516
 Amount of Commitment Expiration per PeriodTotal Amounts
    
    
    Less thanOther Commercial Commitments
    
    Committed
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsStandby letters of credit
    
    $
    97,196
    
    
    $
    97,196
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    288,182
    
    
    
    280,617
    
    
    
    7,550
    
    
    
    15
    
    
    
    Total Commercial Commitments
    
    $
    385,378
    
    
    $
    377,813
    
    
    $
    7,550
    
    
    $
    15
    
    
    $
    
 We have entered into various contractual agreements to purchase telecom services. These agreements
provide for minimum annual spending commitments, and have varying terms through fiscal year 2009,
and are included in purchase obligations in the table above. 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 December 31, 2004,
$288.2 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
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. In addition, we had
approximately $12.5 million of letters of credit which secure our casualty insurance programs. We are obligated to make certain contingent payments to former shareholders of acquired entities
upon satisfaction of certain contractual criteria. As of December 31, 2004, the maximum aggregate
amount of the outstanding contingent payments to former shareholders of acquired entities is
approximately $87.1 million. Upon satisfaction of the specified contractual criteria, any such
payment would result primarily in a corresponding increase in goodwill. During the first six months
of fiscal year 2005, we paid $0.4 million and accrued $4 million, which was paid in January 2005,
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 December 31, 2004, other
accrued liabilities includes 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 December 31,
2004, we serviced a FFEL portfolio of approximately 1.6 million loans with an outstanding principal
balance of approximately $20 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. As of December 31, 2004, other accrued
liabilities includes a reserve for these claims in an amount we believe
to be adequate at this time. 23




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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 24




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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. NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R)
will require companies to measure all employee stock-based compensation awards using a fair value
method and recognize compensation cost in its financial statements. SFAS 123(R) is effective
beginning as of the first interim or annual reporting period beginning after June 15, 2005. We
will be required to adopt SFAS 123(R) beginning July 1, 2005 for new awards of stock-based
compensation granted after that date and for unvested awards outstanding at that date. We are in
the process of determining the impact of the requirements of SFAS 123(R). On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the
Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends received deduction for certain dividends
from controlled foreign corporations. FASB Staff Position 109-2 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004
allows companies additional time beyond that provided in Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes to determine the impact of the Act on its financial
statements and provides guidance for the disclosure of the impact of the Act on the financial
statements. At June 30, 2004, cumulative undistributed earnings of non-U.S. subsidiaries for which
U.S. taxes have not been recorded totaled $16.8 million. This incentive is available to us until
June 30, 2006. The 85% dividends received deduction is subject to a number of limitations,
and we have not yet decided whether, or to what extent, we might repatriate foreign earnings that
have not yet been remitted to the U.S. We will continue to monitor our international activities. 25




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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. 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, results of operations and cash flow 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. Government clients  protests of contract awards. After an award of a government contract,
a competing bidder may protest the award. If we are awarded the contract and it is protested, it
will be necessary to incur costs to defend the award of the contract, which costs may be
significant and could include hiring experts to defend the basis for the contract award. Some
contract protests may take 26




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years to resolve. In some instances where we are awarded a contract, the contracting government
entity may request that we sign a contract and commence services, even though the contract award
has been protested. If the protest is upheld, then our contract would be terminated and the
amounts due to us for services that have been performed to date would be subject to payment
pursuant to the terms of the terminated contract. Such terms may not provide for full recovery of
our incurred costs. In addition, we may suffer negative publicity as the result of the contract
protest being upheld and our contract being terminated. Further, if there is a re-bid of the
contract, we would incur additional costs associated with the re-bid process and be subject to a
potential protest if we are awarded a subsequent contract. 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. Many 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. Many 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 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 second 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 27




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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 $20 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. 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 December 31,
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 December 31, 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 December 31, 2004 that have materially affected or are reasonably
likely to materially affect the Companys internal control over financial reporting. 28




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PART II 
 ITEM 1. LEGAL PROCEEDINGS 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 understand that the DOJ is continuing its investigation,
but we have no information as to when the DOJ will conclude this process. We have cooperated with
the DOJ in producing documents in response to the subpoena, and our internal investigation and
review of this matter through outside legal counsel will continue through the conclusion of the DOJ
investigatory process. We are unable to express an opinion as to the likely outcome of this matter
at this time. 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 $18.6 million for the six months ended December 31, 2004,
representing approximately 1.6% and 0.9% of our fiscal year 2004 and the first six months of 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 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 understand that the DOJ is continuing its investigation, but we have no information
as to when the DOJ will conclude this process. We have cooperated with the DOJ in producing
documents in response to the subpoena, and our internal investigation and review of this matter
through outside legal counsel will continue through the conclusion of the DOJ investigatory
process. We are unable to express an opinion as to the likely outcome of this matter at this time. 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 also 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 workforce 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 the 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 29




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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 December 31, 2004, we had repurchased approximately 15.3 million shares at a total cost of
approximately $758 million and reissued 0.3 million shares
for proceeds totaling $17.3 million to fund contributions to our
employee stock purchase plan and 401(k) plan.
Through February 7, 2005, on a trade date basis, we have
repurchased approximately 17.4 million
shares at a total cost of approximately $874 million. Repurchase activity for the quarter ended December 31, 2004 was as follows. Please refer to the
discussion above for the cumulative repurchases under our share repurchase program. Maximum number (orTotal number of
    
    
    approximate dollarshares purchased
    
    
    value) of shares thatTotal number
    
    
    Average
    
    
    as part of publicly
    
    
    may yet be purchasedof shares
    
    
    price paid
    
    
    announced plans
    
    
    under the plans orPeriod
    
    purchased
    
    
    per share
    
    
    or programs
    
    
    programsInception through September 30, 2004
    
    
    14,992,414
    
    
    $
    49.57
    
    
    
    14,992,414
    
    
    $
    506,802,627October 1  October 31, 2004
    
    
    48,000
    
    
    
    53.50
    
    
    
    48,000
    
    
    
    504,234,737November 1  November 30, 2004
    
    
    225,300
    
    
    
    54.51
    
    
    
    225,300
    
    
    
    491,953,721December 1  December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491,953,721Total  Quarter ended December 31, 2004
    
    
    273,300
    
    
    
    54.33
    
    
    
    273,300
    
    
    
    491,953,721Inception through December 31, 2004
    
    
    15,265,714
    
    
    $
    49.66
    
    
    
    15,265,714
    
    
    $
    491,953,721
 30




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ITEM 5. OTHER INFORMATION On February 2, 2005, our Board of Directors approved several changes in independent director
compensation to be effective for meetings after that date. The following table sets forth a
comparison of previous and current components of independent director compensation: Previous Compensation
    
    
    New CompensationIndependent Director Annual Retainer
    
    $
    35,000
    
    
    $
    45,000Audit Committee Chair Annual Retainer
    
    $
    10,000
    
    
    $
    15,000Nominating
& Corporate Governance Committee Chair Annual Retainer
    
    $
    
    
    
    $
    5,000Compensation Committee Chair Annual
Retainer
    
    $
    5,000
    
    
    $
    5,000Board Meeting (in person)
    
    $
    1,500
    
    
    $
    2,000Board Meeting (telephonic)
    
    $
    1,500
    
    
    $
    1,000Audit Committee Meeting (in person)
    
    $
    1,000
    
    
    $
    2,000Audit Committee Meeting (telephonic)
    
    $
    1,000
    
    
    $
    1,000Annual Stock Option Grant
    
    5,000 shares
    
    
    7,500 sharesInitial Stock Option Grant
    
    20,000 shares
    
    
    20,000 shares
 As a result of the American Jobs Creation Act of 2004, on February 2, 2005 our Board of Directors
also approved an amendment to the existing Severance Agreements with each of Jeffrey A. Rich, Mark
A. King, William L. Deckelman, Jr., Warren D. Edwards, Lynn Blodgett, John Brophy, and Harvey
Braswell to clarify the timing of payment of any previously deferred compensation upon a change of
control. In addition, the Board of Directors also approved entering
into a similar Severance Agreement
with John Rexford. In
order to conform our stock option program with standard market practice, on February 2, 2005, our Board
of Directors approved an amendment to stock options previously granted that did not become
exercisable until five years from the date of grant to provide that such options become exercisable
on the day they vest. Options granted under both our 1997 Stock Incentive Plan and our 1988 Stock
Option Plan generally vest in varying increments over a five year period. It is expected that
future option grants will contain matching vesting and exercise schedules. This amendment does not
amend or affect the vesting schedule, exercise price, quantity of options granted, shares into
which such options are exercisable or life of any award under any outstanding option grant.
Therefore, no compensation expense is required. 
 ITEM 6. EXHIBITS a.)            Exhibits Reference is made to the Index to Exhibits beginning on page 33 for a list of all exhibits
filed as part of this report. 31




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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 8th day
of February, 2005. AFFILIATED COMPUTER SERVICES, INC.By:
    /s/ Warren D. EdwardsWarren D. EdwardsExecutive Vice President and
Chief Financial Officer 32




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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 Amendment No. 1 to Severance Agreement, each dated as of
February 2, 2005, by and between Affiliated Computer Services,
Inc. and each of Jeffrey A. Rich, Mark A. King, Warren D.
Edwards, Lynn Blodgett, Harvey Braswell, John Brophy and William
L. Deckelman, Jr.10.2*
    
    Severance Agreement, dated as of February 2, 2005, by and
between Affiliated Computer Services, Inc. and John Rexford.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 33