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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K



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Mark Onex
    
    Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the fiscal year ended June 30, 2003ORo
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the transition period from  to .Commission file number 0-24787


AFFILIATED COMPUTER SERVICES, INC.

(Exact name of registrant as specified in its charter)


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


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

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

Securities Registered Pursuant to Section 12(b) of the Act:

|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Title of each class                            |  | Name of exchange on
which registered
|                                               |  |                                     
|Class A common stock, par
value $.01 per share |  | New York Stock Exchange             

Securities Registered Pursuant to Section 12(g) of the Act:
NONE

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 the past 90 days.

Yes x No o


Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes x No o


As of September 12, 2003, 126,588,989 shares of Class A common stock were
outstanding. The aggregate market value of the Class A common voting stock
held by nonaffiliates of Affiliated Computer Services, Inc. as of such date,
approximated $6,175,859,000.

DOCUMENTS INCORPORATED BY REFERENCE:Portions of the definitive Proxy Statement
for 2003 Annual Meeting  Part III are incorporated by reference herein.



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TABLE OF CONTENTS



|                                                 |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Table of Contents                               
|PART I                                          
|                                                 | Item 1. Business                                                                             
|                                                 | Item 2. Properties                                                                           
|                                                 | Item 3. Legal Proceedings                                                                    
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                         
|                                                 | Item 5. Market for Our Common Equity and Related Stockholder Matters                         
|                                                 | Item 6. Selected Consolidated Financial Data                                                 
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 8. Financial Statements                                                                 
|                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                 | Item 9A. Controls and Procedures                                                             
|PART III                                        
|PART IV                                         
|                                                 | Item 15. Exhibits, Financial Statements and Reports on Form 8-K                              
|SIGNATURES                                      
|INDEX TO EXHIBITS                               
|EX-3.2 Certificate of Correction to Certificate 
|EX-3.3 Bylaws of the Company                    
|EX-21.1 Subsidiaries of the Company             
|EX-23.1 Consent of PricewaterhouseCoopers LLP   
|EX-31.1 Certification of Chief Executive Officer
|EX-31.2 Certification of Chief Financial Officer
|EX-32.1 Certification of Chief Executive Officer
|EX-32.2 Certification of Chief Financial Officer



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AFFILIATED COMPUTER SERVICES, INC.
FORM 10-K
June 30, 2003

Part IItem 1.
    
    Business
    
    1Item 2.
    
    Properties
    
    9Item 3.
    
    Legal Proceedings
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    10Part IIItem 5.
    
    Market for Our Common Equity and Related Stockholder Matters
    
    11Item 6.
    
    Selected Consolidated Financial Data
    
    13Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    14Item 8.
    
    Financial Statements
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    59Item 9A.
    
    Controls and Procedures
    
    59Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    59Item 11.
    
    Executive Compensation
    
    59Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    59Item 13.
    
    Certain Relationships and Related Transactions
    
    59Item 14.
    
    Principal Accounting Fees and Services
    
    59Part IVItem 15.
    
    Exhibits, Financial Statements and Reports on Form 8-K
    
    59






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PART I







Item 1. Business

General

We are a global, Fortune 500 company delivering comprehensive business process
outsourcing and information technology outsourcing solutions to commercial and
government clients. We were incorporated in Delaware on June 8, 1988 and are
based in Dallas, Texas. We support client operations in nearly 100 countries.
Our clients have time-critical, transaction-intensive business and information
processing needs, and we typically service these needs through long-term
contracts. Approximately 91%, 90% and 89% of our revenues for fiscal years
2003, 2002 and 2001, respectively, were recurring. Recurring revenues are
revenues derived from services that our clients use each year in connection
with their ongoing businesses.

Our services enable businesses and government agencies to focus on core
operations, respond to rapidly changing technologies and reduce expenses
associated with business processes and information processing. Our business
strategy is to expand our client base and enhance our service offerings through
both internal marketing and the acquisition of complementary companies. Our
marketing efforts focus on developing long-term relationships with clients that
choose to outsource mission critical business processes and information
technology requirements. Our business expansion has been accomplished both from
internal growth as well as through acquisitions. Since inception, our
acquisition program has resulted in geographic expansion, growth and
diversification of our client base, expansion of services and products offered,
and increased economies of scale.

We serve three primary markets, which include state and local governments,
commercial clients, and the federal government. We are a leading provider of
business process outsourcing and information technology services to state and
local governments. During fiscal year 2003, revenues from our state and local
government segment accounted for approximately $1.7 billion, or 45% of our
revenues. We provide technology-based services with a focus on transaction
processing and program management services such as child support payment
processing, electronic toll collection, welfare and community services, and
traffic violations processing. We also design, develop, implement, and operate
large-scale health and human services programs and the information technology
solutions that support those programs.

Our commercial sector accounted for approximately $1.2 billion, or 33% of our
fiscal year 2003 revenues. We provide business process outsourcing, technology
outsourcing, and systems integration services to our commercial sector clients.
These services are provided to a variety of clients nationwide, including
healthcare providers, retailers, wholesale distributors, manufacturers,
utilities, financial institutions, insurance and transportation companies. Our
business process outsourcing services include claims processing, finance and
accounting, loan processing, human resource and document processing. Our
technology outsourcing services include mainframe, midrange, desktop, network,
and web-hosting solutions. Our commercial systems integration services include
application development and implementation, applications outsourcing, technical
support and training, as well as network design and installation services.

We also serve the federal government market, which during fiscal year 2003
accounted for approximately $0.9 billion, or 22% of our annual revenues. Our
services in this market are comprised of business process outsourcing services,
which consist primarily of loan processing services and human resources
services, as well as, systems integration services, which include application
development and outsourcing, network implementation and maintenance, desktop
services, technical staff augmentation, and training under long-term contracts.
Approximately 44% of revenues within our federal government business are
derived from civilian agencies with the remaining 56% from Department of
Defense agencies.

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In August 2003, we announced an agreement to sell the majority of our federal
government business to Lockheed Martin Corporation for approximately $658
million, which includes $70 million payable pursuant to a five-year non-compete
agreement. Revenues from the federal business to be divested were approximately
$685 million for fiscal 2003. We will retain our business process outsourcing
contract with the Department of Education, with current annual revenues of $172
million. Additionally, our commercial and state and local government
operations will continue to serve as a subcontractor on portions of the
transferred business. In addition, we will acquire Lockheed Martin
Corporations commercial information technology business, with trailing,
recurring annual revenues of approximately $240 million, for approximately $107
million. These transactions, which are subject to certain closing conditions,
are expected to be completed during the second quarter of fiscal 2004. The
expected after-tax proceeds from the divestiture will generally be used to pay
down debt, to fund our share repurchase program (See Item 5) and for general
corporate purposes.

Market Overview

The demand for our services has grown substantially in recent years, and we
believe that this will continue to increase in the future as a result of
strategic, financial and technological factors. These factors include:



| |  |  | the desire of organizations to focus on their core competencies;
| | - |  | ----------------------------------------------------------------



| |  |  | the increasing desire by organizations to drive process improvements
and improve the speed of and reduce the cost of execution;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the desire by organizations to have a workforce that is able to
expand and contract in relation to their business volumes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the increasing acceptance by organizations to utilize offshore
resources for business process outsourcing;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the increasing complexity of information technology systems and the
need to connect electronically with clients, suppliers, and other
external and internal systems;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the increasing requirements for rapid processing of information and
the instantaneous communication of large amounts of data to multiple
locations; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the desire by organizations to take advantage of the latest advances
in technology without the cost and resource commitment required to
maintain in-house systems.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Business Strategy

The key components of our business strategy include the following:



| |  |  | Expand Client Base- We seek to develop long-term relationships
with new clients by leveraging our subject matter expertise, world-wide
data manufacturing capabilities and infrastructure of information
technology products and services. Our primary focus is to increase our
revenues by obtaining new clients with recurring requirements for
business process and information technology services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand Existing Client Relationships- We seek to expand existing
client relationships by increasing the scope and breadth of services we
provide.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Build Recurring Revenues- We seek to enter into long-term
relationships with clients to provide services that meet their ongoing
business requirements while supporting their mission critical business
process or information technology needs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide Flexible Solutions- We offer custom-tailored business
process and information technology solutions using a variety of
proprietary and third-party licensed software on multiple hardware and
systems software platforms and domestic and international workforces
that are able to expand and contract in relation to clients business
volumes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Invest in Technology- We respond to technological advances and the
rapid changes in the requirements of our clients by committing
substantial amounts of our resources to the operation of multiple
hardware platforms, the customization of products and services that
incorporate new technology on a timely basis and the continuous
training of our personnel.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maximize Economies of Scale- Our strategy is to develop and
maintain a significant client and account/transaction base to create
sufficient economies of scale that enable us to achieve competitive
costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complete Strategic and Tactical Acquisitions- Our acquisition
strategy is to acquire companies to expand the products and services we
offer to existing clients, to obtain a presence in new, complementary
markets and to expand our geographic presence.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Attract, Train and Retain Employees- We believe that attracting,
training, and retaining high quality employees is essential to our
growth. We seek to hire motivated individuals with strong character
and leadership traits and provide them with ongoing technological and
leadership skills training. We emphasize retaining our employees with
challenging work assignments and incentive programs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Segment Information

During the last three fiscal years, our revenues by segment were as follows (in
thousands):

Year ended June 30,2003
    
    2002
    
    2001State and Local Governments
    
    $
    1,694,178
    
    
    $
    1,294,250
    
    
    $
    386,436Commercial (1)
    
    
    1,242,908
    
    
    
    957,333
    
    
    
    929,457Federal Government (2)
    
    
    850,120
    
    
    
    811,335
    
    
    
    747,666Total Revenues
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    2,063,559




|(1) |  | Includes $33.0 million and $37.3 million of revenues from divested
companies for fiscal years 2002 and 2001, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------



|(2) |  | Includes $4.3 million of revenues from divested companies for fiscal
year 2002.
|--- |  | -------------------------------------------------------------------------------

For further information on our segments, see Note 17 to our Consolidated
Financial Statements.

State and Local Governments

We are a leading provider of business process outsourcing services to state and
local governments. Our services help state and local agencies reduce operating
costs, increase revenue streams and increase the quality of services to
citizens. Approximately 45% of our fiscal 2003 consolidated revenues were
derived from contracts with state and local governments. State and local
government clients may terminate most of these contracts at any time, without
cause, for convenience or lack of funding. 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.

Pricing for our services in the state and local market is generally determined
based on the number of transactions processed, human services cases managed or,
in instances where a systems development project is required in our state
healthcare unit, we generally price our services on a fixed fee basis for the
development work.

State Healthcare

We design, develop, implement, and operate large-scale health and human
services programs and the information technology solutions that support those
programs. Today, we operate fourteen state Medicaid programs and six state
Child Health Insurance Programs that cover approximately 19.4 million
recipients, process over 397 million Medicaid healthcare claims annually and
disburse over $40 billion in provider payments. We also operate 25 state
pharmacy benefits management programs that assist states in controlling
prescription drug costs, pharmacy intervention and surveillance and the
processing of drug claims. We

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operate fourteen state decision support systems that assist states with data
collection, fraud and abuse detection and case management. We also assist
states in bringing their health programs into compliance with the Health
Insurance Portability and Accountability Act (HIPAA).

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

Children and Family Services

We are a major provider of child support and payment processing with high
volume remittance processing and service center operations that handle 54% of
the nations payment transactions. We also provide locate and collection
services to find delinquent parents and collect past due child support and
other payments. Within the Children and Family Services area we provide
electronic benefits transfer, which is the issuance of food stamps and cash
benefits through magnetic stripe cards with redemption through point of sale
devices (POS) and automated teller machines (ATM).

Transportation Systems and Services

We focus on three areas within our Transportation Systems and Services:
Electronic Toll Collection, Motor Vehicle Services and Commercial Vehicle
Operations. Within Electronic Toll Collection we offer toll agencies a
complete array of services including the operation of the back-office customer
service center as well as lane installation and integration. We currently
operate the E-ZPass programs in New Jersey and New York, the largest
electronic toll collection program in the world. Within Motor Vehicle
Services, we assist states in the processing of fuel tax and registration
revenues. We process more than 25% of state-issued operating credentials and
support the operations of more than 31% of the motor carriers operating in the
United States. Within Commercial Vehicle Operations we offer a nationwide
network that electronically checks safety credentials and weighs trucks at
highway speed, granting participating truckers authorization to bypass open
weigh stations and ports-of-entry without stopping.

Municipal Services

We serve large cities and counties in the United States by focusing on
revenue-generating transactions that involve interfacing with citizens. These
services are focused in two areas: parking management and violations
processing; and photo enforcement. For our violations processing clients, we
provide complete management, technical and operational support throughout the
entire timeline of a violation, from issuance to final disposition. In photo
enforcement, we use cameras to photograph traffic violations and identify the
registered owner of the vehicle so that the municipality can determine whether
the citation can be mailed.

Our Government Records Management group has been a leading provider of
computerized document indexing and recording solutions for Recorders of Deeds,
by providing computerized record management systems. The client base of this
business group includes nearly 500 system customers and hundreds of customers
that outsource their indexing and document imaging needs to us.

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Welfare and Community Solutions

We provide management, operations and systems service offerings to local
Workforce Development Boards and Coalitions, thereby creating a
government-mandated, integrated One-Stop system linking job seekers and job
providers in accordance with government mandated requirements. Through the
operation of approximately 105 One-Stop centers across the country, we use
technology innovations and re-engineered service delivery models to provide
job-related service to assist low-income families in securing and retaining
employment and help employers find and retain potential employees.

Information Technology Outsourcing

We are a leading provider of full-service IT outsourcing services to cities and
counties throughout the United States. We also provide justice information
systems for state and municipal courts, finance and tax systems for local
governments, and application outsourcing services, and e-government solutions
for state and local customers.

Commercial

Within the commercial sector, which comprises 33% of our fiscal year 2003
consolidated revenues, we provide our clients with business process
outsourcing, technology outsourcing and systems integration services.

Pricing for our services in the commercial market varies by type of service.
For business process outsourcing services, we typically price these services
on the basis of the number of accounts or transactions processed. Our
technology outsourcing services, which are normally provided pursuant to
multi-year contracts, are normally priced on a resource utilization basis.
Resources utilized include processing time, the number of desktops managed,
professional services, data storage and retrieval utilization, and output media
utilized. Our systems integration services are generally offered on a time and
materials basis to existing long-term clients under short-term contractual
arrangements.

Business Process Outsourcing

Our commercial business process outsourcing practice is focused in five major
categories: claims processing, human resources, finance and accounting, loan
processing, and document processing. We provide healthcare and other claims
processing for many of the large healthcare payers in the United States.
Within human resources, we provide benefit claims processing, employee services
call centers, benefits administration, employee relocation, training
administration and learning services, vendor administration, and employee
assistance programs. Within finance and accounting we provide
revenue/invoicing accounting, disbursement processing, expense reporting,
procurement, payroll, cash management, fixed asset accounting, tax processing,
general ledger and other services associated with finance and accounting that
are process and technology sensitive. We handle loan processing services such
as collections, account reconciliations and borrower correspondence for
third-party student loan programs and specialty lending programs. We also
handle the processing and storage of documents for banks, mortgage companies
and other corporations that desire electronic access and storage of their
documents.

We receive client information in all media formats such as over the web, EDI,
fax, voice, paper, microfilm, computer tape, optical disk, or CD ROM.
Information is typically digitized upon receipt and sent through our
proprietary workflow software, which is tailored to our clients process
requirements. Utilizing network technology, we have developed expertise in
transmitting data around the world to our international workforce. We have
approximately 10,000 employees in Mexico, Guatemala, Ghana, Dominican Republic,
Spain, India, Malaysia, Ireland, Germany and China, as well as several other
countries, that support our commercial business process outsourcing services. A
majority of our business process outsourcing workforce is compensated using
performance-based metrics, and as a result, varies with our clients
transaction volumes.

Technology Outsourcing

We offer a complete range of technology outsourcing solutions to commercial
businesses desiring to improve the performance of their information technology
organizations. Our target market for technology outsourcing services consists
of medium-to-large-sized commercial organizations with time-critical,
transaction-intensive information processing needs. Our technology outsourcing
solutions include the delivery of information processing services on a remote
basis from host data centers that

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provide processing capacity, network management and desktop support.
Information processing services include mainframe, mid-range, desktop, network,
and web-hosting solutions.

We provide our technology outsourcing solutions through an extensive data
center network, which is comprised of three host data centers and eight remote
data centers. Our data centers and clients are connected via an extensive
telecommunications network. We monitor and maintain local and wide area
networks on a seven-day, 24hour basis and provide shared hub satellite
transmission service as an alternative to multi-drop and point-to-point hard
line telecommunications networks.

Systems Integration Services

Our systems integration services include application development and
implementation, applications outsourcing, technical support and training, as
well as network design and installation services. Our systems integration
services include the development of web-based applications and web-enablement
of information technology assets, allowing our clients to conduct business with
their customers and business partners via the Internet. We also provide
systems integration services to clients who are deploying client/server
architectures, advanced networks and outsourcing legacy applications
maintenance.

Federal Government

Within the federal government sector, we provide business process outsourcing
and systems integration services. Approximately 22% of our fiscal year 2003
consolidated revenues are derived from contracts and subcontracts with federal
government agencies. Our federal government contract costs and fees are
subject to audit by the Defense Contract Audit Agency (DCAA). These audits
may result in adjustments to contract costs and fees reimbursed by our federal
customers. To date, we have experienced no material adjustments as a result of
audits by the DCAA. The DCAA has completed audits of the Companys defense
contracts through fiscal year 2001 and all other federal contracts through
fiscal year 2000.

Pricing for services provided to our federal government clients varies by type
of service. Business process outsourcing services provided to federal
government clients are generally priced on the basis of the number of accounts
or transactions processed. For applications development, applications
outsourcing, network implementation and maintenance, desktop services,
technical staff support, and training, we generally price these services on a
cost plus fixed fee and time and materials basis.

Business Process Outsourcing

Our federal business process outsourcing services consist primarily of loan
servicing and human resource services for federal agencies. Our loan services
generally include billing, lock-box payment processing, related accounting and
reconciliation, and client service call center and web-site operations. In
addition to the Department of Education contract discussed below, we have
contracts with the Defense Finance & Accounting Services, Housing and Urban
Development, Ginnie Mae and Pension Benefit Guarantee Corporation.

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

On January 31, 2003 FSA officials notified us that they would conduct a
competitive procurement for Common Services for Borrowers which will be an
integrated solution for FSA for servicing, consolidation and collections
functions for federally insured student aid obligations and will absorb all
loan servicing requirements for the Department. The Department announced that
the competitive procurement would be conducted in two phases with phase one
being the determination of eligibility to participate and phase two being the
selection process. We, along with Sallie Mae and a third participant who
subsequently withdrew from the competition were selected as eligible to
participate. On July 7, 2003, we submitted our

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proposal to the Department. In August 2003, the Department notified us that it
had determined that we are in the competitive range for award, and that
negotiations would begin shortly to be followed by the Departments request for
submission of final proposal revisions and an award determination. We
anticipate that the Department will make a decision on the procurement in
October 2003 and believe we are positioned favorably because of our performance
record with the Department. However, there can be no assurance that we will be
awarded the new contract for Common Services to Borrowers.

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

Systems Integration Services

We provide applications development, applications outsourcing, network
implementation and maintenance, desktop services, technical staff support, and
training under long-term contracts to the Department of Defense and civilian
agencies, who generally either contract directly with us or through the General
Services Administration for these services. The General Services
Administration performs the procurement function for many civilian and
Department of Defense agencies. Approximately 33% of these services for fiscal
year 2003 were provided pursuant to six contracts with the General Services
Administration. We also provide our services directly to a variety of civilian
agencies such as the Departments of Labor, Treasury, Transportation and Energy,
as well as NASA, FAA, the U.S. Postal Service, and the Federal Energy
Regulatory Commission. In addition to the above services, we provide command
and control, communications, computer and intelligence, surveillance, and
reconnaissance (C4 and ISR) systems integration services to a variety of
Department of Defense agencies such as Air Force Materiel Command, the U.S.
Unified Commands, and the National Security Agency.

Revenues by Service Line

Our revenues by service line over the past three years are shown in the
following table (in thousands):

Year ended June 30,2003
    
    2002
    
    2001Business process outsourcing
    
    $
    2,582,773
    
    
    $
    1,942,865
    
    
    $
    974,244Systems integration services
    
    
    711,585
    
    
    
    678,804
    
    
    
    648,244Technology outsourcing
    
    
    492,848
    
    
    
    441,249
    
    
    
    441,071Total
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    2,063,559


Client Base

We achieve growth in our client base through internal marketing and
acquisitions of other business process and information technology services
companies. We have a diverse client base. Within the state and local
government segment, our clients include a wide variety of state governments,
municipal governments and agencies. Within the commercial segment, we serve all
of the major vertical markets that spend heavily on technology including the
healthcare, retail, transportation, manufacturing and financial industries.
Within the federal government segment, our clients include both the Department
of Defense agencies and various civilian agencies. Clients may be lost due to
merger, business failure, or conversion to a competing processor or to an
in-house system. Our business with government clients is subject to various
risks, including the reduction or modification of contracts due to changing
government needs and requirements. Government contracts, by their terms,
generally can be terminated for convenience by the government, which means that
the government may terminate the contract at any time, without cause, and in
certain instances we would be entitled to receive compensation only for the
services provided or stranded asset costs incurred at the time of termination.

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Approximately 91%, 90% and 89% of our revenues for fiscal years 2003, 2002 and
2001, respectively, were recurring. We define recurring revenues as revenues
derived from services that are used by our clients each year in connection with
their ongoing businesses, and accordingly, exclude conversion and deconversion
fees, software license fees, short-term contract programming engagements,
product installation fees, and hardware sales.

Our five largest clients accounted for approximately 13%, 14% and 18% of our
fiscal years 2003, 2002 and 2001 revenues, respectively. Our largest client
represents 4% of our consolidated revenues. In addition, over 99% of our
consolidated revenues are derived from domestic clients.

Competition

The markets for our services are intensely competitive and highly fragmented.
The most significant competitive factors are the reliability and quality of
services, technical competence and the price of services.

We compete in the state and local market by offering a full range of
outsourcing services and by leveraging our subject matter expertise, technical
skills and infrastructure to achieve economies of scale. Competition in the
state and local market is fragmented by line of services and we are a leading
provider in these areas. Competition for our state healthcare services and
municipal services is primarily Electronic Data Systems Corporation (EDS).
Competition for our welfare and community services is primarily Maximus. In
child and family services, our primary competitors are Bank One, Citibank, IBM
and Tier Technologies (Tier). Competition for our electronic toll collection
services is primarily Transcore. In addition, there are numerous local
competitors that we face in our state and local segment.

We compete in the commercial market by offering technology outsourcing services
that leverage our data center infrastructure, value added business process
outsourcing services which leverage our technical skills, proprietary workflow
software, offshore workforce, and economies of scale. The competition for our
commercial outsourcing services include EDS, Computer Sciences Corp. (CSC),
IBM, Hewlett-Packard, CGI, Exult, Accenture, Sourcecorp, Inc., Sallie Mae,
Perot Systems and in-house departments performing the function we are seeking
to outsource. We may be required to purchase technology assets from prospective
clients or to provide financial assistance to prospective clients in order to
obtain their contracts. Many of our competitors have substantially greater
resources and thus, may have a greater ability to obtain client contracts where
sizable asset purchases or investments are required. To maintain competitive
prices, we operate with low overhead and maintain a significant client base and
account/transaction base to achieve sufficient economies of scale. The
competition for our commercial business process outsourcing services is most
often clients in-house departments currently performing the function that they
are seeking to outsource.

In the federal government market, we actively compete with small specialized
firms as well as with large competitors with a wider range of systems
integration services. We believe that the key competitive factors in obtaining
and retaining clients include the ability to understand project requirements,
deliver appropriate skill sets in a timely manner and price services
effectively. We must also compete for qualified personnel through competitive
wages and by maintaining a consistent demand for the skills recruited. Our
competition in the federal government market includes EDS, CSC, Science
Applications International Corporation, Lockheed Martin, Anteon International
Corporation, CACI International Inc. and numerous other government contractors.

In the future, competition could continue to emerge from large computer
hardware providers as they shift their business strategy from hardware to both
services and hardware. Competition could also emerge from European service
providers seeking to expand into North America, and from large consulting
companies seeking operations outsourcing opportunities. We are also beginning
to see the convergence of technology outsourcing and business process
outsourcing. We believe that vendors such as ourselves who have the
infrastructure and capabilities to provide both services will benefit the
greatest from this emerging trend.

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Sales and Marketing

We market our services through subject matter experts and field sales forces
located throughout the United States. In order to enhance our sales and
marketing efforts, we seek to hire sales representatives who have significant
technical and subject matter expertise in the industries to which they will be
marketing. Many of our existing subject matter experts have served in the
industries in which they are servicing. Our sales forces are focused on
specific service offerings or vertical markets, allowing our representatives to
keep abreast of technology and industry developments.

Employees

We believe that our success depends on our continuing ability to attract and
retain skilled technical, marketing and management personnel. As of June 30,
2003, we had approximately 40,000 employees, including approximately 30,000
employed domestically, with the balance employed in our international
operations. Of the domestic employees, approximately 200 are represented by a
union. Approximately 1,700 of our international employees are represented by
unions, primarily in Mexico. We have had no work stoppages or strikes by our
employees. Management considers its relations with employees and union
officials to be good.

As of June 30, 2003, approximately 23,000 employees provide services to our
commercial clients, approximately 12,000 employees provide services to our
state and local government clients and approximately 5,000 employees provide
services to our federal government clients. Approximately 2,400 of our
employees have federal government security clearances.

U.S. Securities and Exchange Commission Reports

All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and all amendments to those reports, filed with or
furnished to the U.S. Securities and Exchange Commission (SEC) on or after
September 17, 2002 are available free of charge through our internet website,
www.acs-inc.com, as soon as reasonably practical after we have electronically
filed such material with, or furnished it to, the SEC.







Item 2. Properties

As of June 30, 2003, we have approximately 453 locations in the United States
and 21 locations in nine other countries. In addition, our employees are in
numerous client locations where we neither own nor lease the occupied space.
We own approximately 1.2 million square feet of real estate space and
approximately 5.8 million square feet is leased. The leases expire from
calendar years 2003 to 2018 and we do not anticipate any significant difficulty
in obtaining lease renewals or alternate space. Our executive offices are
located in Dallas, Texas at a company-owned facility of approximately 630,000
square feet, which also houses a host data center and other operations. We
believe that our current facilities are suitable and adequate for our business.







Item 3. Legal Proceedings

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

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

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On March 3, 2003, we filed a Petition for Review with the Texas Supreme Court
requesting that the Court reverse the decision of the court of appeals and
render judgment that the plaintiffs take nothing or, alternatively, remand the
case to the trial court for further proceedings. The plaintiffs did not file a
petition for review with the Texas Supreme Court. On June 19, 2003, the Texas
Supreme Court requested that the parties file briefs on the merits of the
appeal. We filed our brief on the merits on August 20, 2003, and the
plaintiffs brief on the merits is currently due by October 9, 2003.

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

One of our subsidiaries, ACS Defense, Inc., and several other government
contractors received a grand jury document subpoena issued by the U.S. District
Court for the District of Massachusetts in October 2002. The subpoena was
issued in connection with an inquiry being conducted by the Antitrust Division
of the U.S. Department of Justice. The inquiry concerns certain IDIQ
(Indefinite Delivery  Indefinite Quantity) procurements and their related
task orders which occurred in the late 1990s at Hanscom Air Force Base in
Massachusetts. Our revenue from the contracts that we believe to be the focus
of the Justice Departments inquiry is approximately $25 million per year
representing approximately 0.6% of our annual revenue. We are conducting an
ongoing internal investigation of this matter through outside legal counsel and
we are cooperating with the Department of Justice in producing documents in
response to the subpoena and arranging for Department of Justice interviews of
employees and former employees.

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

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

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







Item 4. Submission of Matters to a Vote of Security Holders

During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of our security holders.

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PART II







Item 5. Market for Our Common Equity and Related Stockholder Matters

Our Class A common stock is traded on the New York Stock Exchange (NYSE)
under the symbol ACS. The following table sets forth the high and low sales
prices of our Class A common stock for the last two fiscal years as reported on
the NYSE. All share and per share information is presented giving effect to the
two-for-one stock split of our Class A and Class B common shares that occurred
February 22, 2002.

Fiscal year ended June 30, 2003
    
    High
    
    LowFirst Quarter
    
    $
    49.90
    
    
    $
    34.84Second Quarter
    
    
    54.00
    
    
    
    32.70Third Quarter
    
    
    56.56
    
    
    
    41.16Fourth Quarter
    
    
    53.00
    
    
    
    40.01


Fiscal year ended June 30, 2002
    
    High
    
    LowFirst Quarter
    
    $
    43.70
    
    
    $
    35.10Second Quarter
    
    
    53.62
    
    
    
    39.25Third Quarter
    
    
    57.05
    
    
    
    43.75Fourth Quarter
    
    
    56.65
    
    
    
    44.30


On September 12, 2003, the last reported sales price of our Class A common
stock as reported on the NYSE was $49.83 per share.

Except for the cash dividends paid by ACS Government Solutions Group, Inc.
prior to its becoming part of our company by a December 1997 merger, we have
not paid any cash dividends to date on our common stock. We intend to continue
to retain earnings for use in the operation of our business and, therefore, do
not anticipate paying any cash dividends in the foreseeable future. Under the
terms of our unsecured revolving credit agreement we are allowed to pay cash
dividends. However, any cash dividends paid must be included in our fixed
charge covenant calculation under our unsecured revolving credit facility
credit agreement. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.

On September 2, 2003, subsequent to year end, we announced that our Board of
Directors authorized a share repurchase program of up to $500 million of our
Class A common stock effective immediately. The program, which is open-ended,
will allow us to repurchase our shares on the open market from time to time in
accordance with the requirements of the SEC, including shares that could be
purchased pursuant to SEC Rule 10b5-1. The number of shares to be purchased and
the timing of purchases will be based on the level of cash and debt balances,
general business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources,
including, but not limited to, cash flow from operations, borrowings under our
existing revolving credit facility, and if consummated, proceeds from the sale
of the majority of our federal government business. Through September 12,
2003, we have repurchased 250,000 shares at a total cost of $12.6 million.

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The following table summarizes certain information related to our stock option
and employee stock purchase plans.

Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    
    
    
    
    compensation plansexercise of
    
    
    
    
    
    (excludingoutstanding
    
    Weighted average
    
    securitiesoptions, warrants
    
    exercise price of
    
    reflected inand rights
    
    outstanding options,
    
    initial column)Plan Category
    
    as of June 30, 2003
    
    warrants and rights
    
    as of June 30, 2003Equity compensation plans
approved by security
shareholdersStock options
    
    
    12,959,800
    
    
    $
    27.42
    
    
    
    4,681,140Employee stock purchase
plan
    
    
    N/A
    
    
    
    N/A
    
    
    
    1,902,659Equity compensation plans
not approved by security
shareholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12,959,800
    
    
    $
    27.42
    
    
    
    6,583,799


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Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data are qualified by reference
to and should be read in conjunction with our Consolidated Financial Statements
and Notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this document. All
share and per share information is presented giving effect to the two-for-one
stock split of our Class A and Class B common shares that occurred February 22,
2002 (in thousands, except per share amounts).

As of and for the year ended June 30,2003
    
    2002
    
    2001
    
    2000
    
    1999Results of Operations Data:Revenues
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    2,063,559
    
    
    $
    1,962,542
    
    
    $
    1,642,216Net income(1)
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292
    
    
    $
    109,312
    (2)
    
    $
    86,230Earnings per share  basic
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35
    
    
    $
    1.11
    (2)
    
    $
    .88Earnings
per share  diluted
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23
    
    
    $
    1.03
    (2)
    
    $
    .83Weighted
average shares outstanding  basic
    
    
    132,445
    
    
    
    118,646
    
    
    
    99,758
    
    
    
    98,487
    
    
    
    97,678Weighted
average shares outstanding  diluted
    
    
    143,430
    
    
    
    137,464
    
    
    
    116,456
    
    
    
    111,613
    
    
    
    111,336Balance Sheet Data:Working capital
    
    $
    422,022
    
    
    $
    388,576
    
    
    $
    528,563
    
    
    $
    413,632
    (3)
    
    $
    194,226Total assets
    
    $
    3,698,705
    
    
    $
    3,403,567
    
    
    $
    1,891,687
    
    
    $
    1,656,446
    
    
    $
    1,223,600Total long-term debt
(less current portion)
    
    $
    498,340
    
    
    $
    708,233
    
    
    $
    649,313
    
    
    $
    525,619
    
    
    $
    349,106Stockholders equity
    
    $
    2,429,188
    
    
    $
    2,095,420
    
    
    $
    885,515
    
    
    $
    711,377
    
    
    $
    607,421




| | (1) |  | We adopted Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets (SFAS 142) effective July 1,
2001.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Net income for fiscal year 2000 includes $1.1 million, or $.01 per
share (net of tax), of net non-operating gains resulting from
divestiture and restructuring activities.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Working capital at June 30, 2000 included $180.3 million of
receivables from the divestiture of business units prior to June 30,
2000, and $43.4 million of net assets held-for-sale from business units
to be divested subsequent to June 30, 2000.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

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

General

We derive our revenues from delivering comprehensive business process
outsourcing and information technology outsourcing solutions as well as system
integration services to commercial, state and local, and federal government
clients. A substantial portion of our revenues is derived from recurring
monthly charges to our customers under service contracts with initial terms
that vary from one to ten years. For the fiscal year ended June 30, 2003,
approximately 91% of our revenues were recurring. We define recurring revenues
as revenues derived from services that are used by our clients each year in
connection with their ongoing businesses, and accordingly, exclude conversion
and deconversion fees, software license fees, short-term contract programming
engagements, product installation fees, and hardware sales. Since inception,
our acquisition program has resulted in geographic expansion, growth and
diversification of our client base, expansion of services offered, and
increased economies of scale. All share and per share information is presented
giving effect to the two-for-one stock split of our Class A and Class B common
shares that occurred February 22, 2002.

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

Significant Developments  Fiscal Year 2003

During fiscal 2003, we signed contracts with new clients and increased business
with existing clients representing $701 million of annual recurring new
revenue, an increase of 47% over the prior year. The state and local segment
contributed 50% of new business signings, including new contracts with the
Texas Health and Human Services Commission to provide fiscal agent and
administrative services and New Jersey E-ZPass to provide electronic toll
collection services. The commercial segment contributed 42% of new business
signings, including new contracts with Motorola to provide human resource
outsourcing and Ingram Micro to manage their IT infrastructure. We define new
business signings as recurring revenue from new contracts, including the
incremental portion of renewals signed during the period and represent the
estimated annual recurring revenues, as measured under GAAP, to be recorded
under that contract after full implementation. We use new business signings as
a measure of estimated recurring revenues represented by contractual
commitments both to forecast prospective revenues and to estimate capital
commitments.

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In January 2003, we acquired CyberRep, Inc. (CyberRep), which is included in
our commercial segment. CyberRep provides customer care and customer
relationship management services for the telecommunications, wireless
communications, technology, and consumer products industries. The transaction
was valued at $42 million plus transaction costs. CyberReps operating results
are included in our consolidated financial statements from the effective date
of the acquisition, January 1, 2003.

We completed four other acquisitions during fiscal 2003, all of which were
included in our state and local governments segment.

Significant Developments  Fiscal Year 2002

During fiscal 2002, we signed significant new contracts with new clients and
incremental business with existing clients representing $478 million of annual
recurring new revenue. We acquired eight companies in fiscal year 2002, two of
which serve our state and local segment, four of which serve our commercial
segment, one of which serves our federal segment, and AFSA, which serves all
three segments.

In August 2001, we acquired IMS, a wholly-owned subsidiary of Lockheed Martin
Corporation, now known as ACS State and Local Solutions, for $825 million plus
transaction costs. ACS State and Local Solutions, with its principal offices
located in Washington, D.C. and approximately 4,800 employees primarily
throughout the United States, provides services to state and local government
agencies in child support enforcement, welfare and community services,
electronic toll collection, and other intelligent transportation services
involving the trucking industry, photo enforcement of red-light and speeding
violations, parking management, and information technology outsourcing. ACS
State and Local Solutions operating results are included in our consolidated
financial statements from the effective date of the acquisition, August 1,
2001.

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

On October 10, 2001, we completed our offering of 18.4 million shares of our
Class A common stock (adjusted for stock split). The shares were issued at
$40.50 per share yielding proceeds of $714.3 million (net of underwriters fees
and other costs), which were used to repay the $550 million 18-month interim
credit facility incurred to fund the IMS acquisition and a portion of the
amount outstanding under our revolving credit facility.

In December 2001, we received an extension of our contract with the Department
of Education for its Direct Student Loan program, our largest contract, through
September 2006, with an option for extension through September 2007. This
extension has been protested by Sallie Mae, and their protest was upheld
although our contract extension was not rescinded. (See Item 1. Business.
Federal Government. Business Process Outsourcing for further discussion of this
contract.)

In February 2002, we completed a two-for-one stock split of our outstanding
Class A common stock and Class B common stock implemented in the form of a 100%
stock dividend (Stock Split). Each holder of record of our Class A common
stock and Class B common stock as of the close of business on February 15, 2002
received an additional share of such stock held by them at that time.

On March 15, 2002, we completed the redemption of our 4% Convertible
Subordinated Notes due March 15, 2005 (the 4% Notes). Holders of all of the
outstanding 4% Notes converted their 4% Notes to shares of our Class A common
stock in accordance with Article XII of the Indenture dated as of March 20,
1998 between ACS and U.S. Trust Company of Texas, N.A., as trustee prior to the
March 15, 2002 redemption date. As a result of such conversions, approximately
10.8 million shares of our Class A common stock were issued to such holders.

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

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

Significant Developments  Fiscal Year 2001

During fiscal year 2001, we signed new contracts with new clients and
incremental business with existing clients totaling $345 million of annual
recurring new revenue. We also acquired five companies, three of which serve
our state and local government segment and two of which serve our commercial
segment.

In the third quarter of fiscal year 2001, we sold a new issue of $317 million
of 3.5% Convertible Subordinated Notes due February 15, 2006 (the 3.5%
Notes). The 3.5% Notes are convertible at any time prior to the maturity date,
unless redeemed or repurchased, into our Class A common stock at a conversion
rate of 23.0234 shares of Class A common stock for each $1,000 principal amount
of 3.5% Notes (equivalent to a conversion price of $43.44 per share of Class A
common stock), subject to adjustments in certain events. The 3.5% Notes may be
redeemed at our option on or after February 18, 2004, in whole or in part, at
the redemption prices set forth in the 3.5% Notes.

Subsequent Events

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

On September 2, 2003, subsequent to year end, we announced that our Board of
Directors authorized a share repurchase program of up to $500 million of our
Class A common stock effective immediately. The program, which is open-ended,
will allow us to repurchase our shares on the open market from time to time in
accordance with the requirements of the SEC, including shares that could be
purchased pursuant to SEC Rule 10b5-1. The number of shares to be purchased and
the timing of purchases will be based on the level of cash and debt balances,
general business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources,
including, but not limited to, cash flow from operations, borrowings under our
existing revolving credit facility and, if consummated, proceeds from the sale
of the majority of our federal government business. Through September 12, 2003,
we have repurchased 250,000 shares at a total cost of approximately $12.6
million.

16



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##### Table of Contents



Revenue Growth

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

Consolidated

Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2003
    
    2002
    
    $ Growth
    
    Growth %
    
    2002
    
    2001
    
    $ Growth
    
    Growth %Total Revenues
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    724,288
    
    
    
    24
    %
    
    $
    3,062,918
    
    
    $
    2,063,559
    
    
    $
    999,359
    
    
    
    48
    %Less: Divestitures
    
    
    
    
    
    
    (37,340
    )
    
    
    37,340
    
    
    
    
    
    
    
    
    
    
    
    (37,320
    )
    
    
    37,320Adjusted
    
    $
    3,787,206
    
    
    $
    3,025,578
    
    
    $
    761,628
    
    
    
    25
    %
    
    $
    3,062,918
    
    
    $
    2,026,239
    
    
    $
    1,036,679
    
    
    
    51
    %Acquired revenues
    
    $
    451,583
    
    
    $
    146,236
    
    
    $
    305,347
    
    
    
    10
    %
    
    $
    779,585
    
    
    $
    23,424
    
    
    $
    756,161
    
    
    
    37
    %Internal revenues
    
    
    3,335,623
    
    
    
    2,879,342
    
    
    
    456,281
    
    
    
    15
    %
    
    
    2,283,333
    
    
    
    2,002,815
    
    
    
    280,518
    
    
    
    14
    %Total
    
    $
    3,787,206
    
    
    $
    3,025,578
    
    
    $
    761,628
    
    
    
    25
    %
    
    $
    3,062,918
    
    
    $
    2,026,239
    
    
    $
    1,036,679
    
    
    
    51
    %


State & Local Government

Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2003
    
    2002
    
    $ Growth
    
    Growth %
    
    2002
    
    2001
    
    $ Growth
    
    Growth %Total Revenues
    
    $
    1,694,178
    
    
    $
    1,294,250
    
    
    $
    399,928
    
    
    
    31
    %
    
    $
    1,294,250
    
    
    $
    386,436
    
    
    $
    907,814
    
    
    
    235
    %Less: Divestitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted
    
    $
    1,694,178
    
    
    $
    1,294,250
    
    
    $
    399,928
    
    
    
    31
    %
    
    $
    1,294,250
    
    
    $
    386,436
    
    
    $
    907,814
    
    
    
    235
    %Acquired revenues
    
    $
    242,379
    
    
    $
    111,371
    
    
    $
    131,008
    
    
    
    10
    %
    
    $
    689,995
    
    
    $
    23,424
    
    
    $
    666,571
    
    
    
    173
    %Internal revenues
    
    
    1,451,799
    
    
    
    1,182,879
    
    
    
    268,920
    
    
    
    21
    %
    
    
    604,255
    
    
    
    363,012
    
    
    
    241,243
    
    
    
    62
    %Total
    
    $
    1,694,178
    
    
    $
    1,294,250
    
    
    $
    399,928
    
    
    
    31
    %
    
    $
    1,294,250
    
    
    $
    386,436
    
    
    $
    907,814
    
    
    
    235
    %


Commercial

Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2003
    
    2002
    
    $ Growth
    
    Growth %
    
    2002
    
    2001
    
    $ Growth
    
    Growth %Total Revenues
    
    $
    1,242,908
    
    
    $
    957,333
    
    
    $
    285,575
    
    
    
    30
    %
    
    $
    957,333
    
    
    $
    929,457
    
    
    $
    27,876
    
    
    
    3
    %Less: Divestitures
    
    
    
    
    
    
    (32,997
    )
    
    
    32,997
    
    
    
    
    
    
    
    
    
    
    
    (37,320
    )
    
    
    37,320Adjusted
    
    $
    1,242,908
    
    
    $
    924,336
    
    
    $
    318,572
    
    
    
    34
    %
    
    $
    957,333
    
    
    $
    892,137
    
    
    $
    65,196
    
    
    
    7
    %Acquired revenues
    
    $
    190,004
    
    
    $
    28,465
    
    
    $
    161,539
    
    
    
    17
    %
    
    $
    76,790
    
    
    $
    
    
    
    $
    76,790
    
    
    
    8
    %Internal revenues
    
    
    1,052,904
    
    
    
    895,871
    
    
    
    157,033
    
    
    
    17
    %
    
    
    880,543
    
    
    
    892,137
    
    
    
    (11,594
    )
    
    
    -1
    %Total
    
    $
    1,242,908
    
    
    $
    924,336
    
    
    $
    318,572
    
    
    
    34
    %
    
    $
    957,333
    
    
    $
    892,137
    
    
    $
    65,196
    
    
    
    7
    %


Federal Government

Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2003
    
    2002
    
    $ Growth
    
    Growth %
    
    2002
    
    2001
    
    $ Growth
    
    Growth %Total Revenues
    
    $
    850,120
    
    
    $
    811,335
    
    
    $
    38,785
    
    
    
    5
    %
    
    $
    811,335
    
    
    $
    747,666
    
    
    $
    63,669
    
    
    
    9
    %Less: Divestitures
    
    
    
    
    
    
    (4,343
    )
    
    
    4,343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted
    
    $
    850,120
    
    
    $
    806,992
    
    
    $
    43,128
    
    
    
    5
    %
    
    $
    811,335
    
    
    $
    747,666
    
    
    $
    63,669
    
    
    
    9
    %Acquired revenues
    
    $
    19,200
    
    
    $
    6,400
    
    
    $
    12,800
    
    
    
    1
    %
    
    $
    12,800
    
    
    $
    
    
    
    $
    12,800
    
    
    
    2
    %Internal revenues
    
    
    830,920
    
    
    
    800,592
    
    
    
    30,328
    
    
    
    4
    %
    
    
    798,535
    
    
    
    747,666
    
    
    
    50,869
    
    
    
    7
    %Total
    
    $
    850,120
    
    
    $
    806,992
    
    
    $
    43,128
    
    
    
    5
    %
    
    $
    811,335
    
    
    $
    747,666
    
    
    $
    63,669
    
    
    
    9
    %


17



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##### Table of Contents



Results of Operations

The following table sets forth certain items from our Consolidated Statements
of Income expressed as a percentage of revenues:

Percentage of RevenuesYear ended June 30,2003
    
    2002
    
    2001Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Wages and benefits
    
    
    45.3
    
    
    
    44.1
    
    
    
    43.8Services and supplies
    
    
    26.3
    
    
    
    29.0
    
    
    
    29.0Rent, lease and maintenance
    
    
    9.3
    
    
    
    9.1
    
    
    
    10.8Depreciation and amortization
    
    
    4.0
    
    
    
    3.6
    
    
    
    4.5Other operating expenses
    
    
    1.4
    
    
    
    1.1
    
    
    
    0.9Total operating expenses
    
    
    86.3
    
    
    
    86.9
    
    
    
    89.0Operating income
    
    
    13.7
    
    
    
    13.1
    
    
    
    11.0Interest expense
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.2Other non-operating expense (income), net
    
    
    0.1
    
    
    
    0.3
    
    
    
    (1.0
    )Pretax profit
    
    
    13.0
    
    
    
    11.8
    
    
    
    10.8Income tax expense
    
    
    4.9
    
    
    
    4.3
    
    
    
    4.2Net income
    
    
    8.1
    %
    
    
    7.5
    %
    
    
    6.6
    %


Comparison of Fiscal Year 2003 to Fiscal Year 2002

Revenues
Revenues increased $0.7 billion, or 24%, to $3.8 billion in fiscal year 2003
from $3.1 billion in fiscal year 2002. Internal revenue growth for fiscal year
2003 was 15% and the remaining growth resulted from acquisitions.

Revenues in our state and local government segment increased $399.9 million to
$1.7 billion in fiscal year 2003 from $1.3 billion in fiscal year 2002, or 31%
over the prior year, including the full year impact of the AFSA and Andersen
acquisitions. Internal revenue growth was 21%, due primarily to new contracts,
including contracts with the Texas Health and Human Services Commission for
fiscal agent and administrative services to support the States Medicaid
traditional fee-for-service program and the Texas Health Network primary care
case management and managed care program, New Jersey to operate its E-ZPass
system and State of Ohio to operate its child support collections and
disbursement unit, increased revenues from violation processing and welfare and
community services lines of business and full year impact of the Georgia
Medicaid contract signed in the fourth quarter of fiscal year 2002.

Revenues in our commercial segment increased $285.6 million, or approximately
30%. After adjusting for revenues of operations divested in fiscal year 2002
of $33.0 million, internal growth was 17% due primarily to the Motorola and
Ingram Micro contracts and full year impact of the Ingersoll Rand contract
signed in the fourth quarter of fiscal year 2002. Acquisition growth in our
commercial segment was 17% due primarily to the full year impact of the fiscal
year 2002 AFSA and Andersen acquisitions.

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##### Table of Contents



Revenues in our federal government segment increased $38.8 million, or
approximately 5%, of which 4% is due to internal growth. The lower growth in
the federal government segment is the result of the loss of the desktop
services contract with the United States Senate, which was not renewed
effective June 30, 2002 and weak new business signings in the civilian sector.

Operating Expense
As a percentage of revenue, operating expense decreased 0.6% to 86.3% in fiscal
year 2003 from 86.9% in fiscal year 2002.

Wages and benefits increased $366.9 million, or 27% in fiscal year 2003. As a
percentage of revenues, wages and benefits increased 1.2% to 45.3% in fiscal
year 2003 from 44.1% in fiscal year 2002 due to increased business process
outsourcing services in our revenue mix. The increase in business process
outsourcing services is primarily the result of our 2002 acquisitions of AFSA
and Andersen, as well as new business growth. Prior to the acquisition, AFSA
served as a sub-contractor on the Department of Education contract, and
therefore the payments to AFSA were included in services and supplies.
Subsequent to the acquisition, AFSAs employee costs related to this contract
are included in wages and benefits. In addition, business process outsourcing
(BPO) services have a higher component of wages and benefits than traditional
technology outsourcing. BPO services accounted for approximately 68% of our
fiscal year 2003 revenues as compared to approximately 63% in fiscal year 2002.

Services and supplies increased $105.9 million, or 12%, to $1.0 billion. As a
percentage of revenues, services and supplies decreased 2.7% to 26.3% in fiscal
year 2003, primarily due to the acquisition of AFSA in June 2002 as discussed
in wages and benefits above.

Rent, lease and maintenance expense increased $73.2 million to $351.9 million
in fiscal year 2003. As a percentage of revenue, rent, lease and maintenance
increased 0.2% to 9.3% for fiscal year 2003 due to new information technology
outsourcing contracts in our commercial segment. Information technology
contracts have a higher component of rent, lease and maintenance than our other
lines of business.

Depreciation and amortization increased $41.6 million to $152.1 million in
fiscal year 2003. As a percentage of revenue, depreciation and amortization
increased 0.4%, to 4.0%, due to capital expenditures during the year resulting
from our growth and increased customer related intangible asset amortization as
a result of acquisitions during fiscal years 2003 and 2002.

Other operating expenses increased $18.0 million to $52.6 million during fiscal
year 2003. As a percentage of revenue, other operating expenses increased 0.3%
due to increased legal and marketing expenses.

Operating Margins
Our operating margins increased 0.6% to 13.7% during fiscal year 2003 due to a
decrease in services and supplies as a percentage of revenues, offset by
increases in depreciation and amortization, wages and benefits and other
operating expenses as a percentage of revenue as discussed above.

Interest Expense
Interest expense decreased $5.4 million to $25.2 million primarily due to lower
average outstanding borrowings and lower borrowing costs, resulting from the
conversion to equity of the 4% Notes in March 2002 and reductions in amounts
outstanding under our credit facilities.

Other Non-Operating Expense (Income)
Other non-operating expense in fiscal year 2003 includes $3.4 million of
write-downs of long-term cost basis investments during fiscal year 2003. Other
non-operating expense in fiscal year 2002 includes $8.4 million of write-downs
of long-term cost basis investments and a $2.3 million loss on the sale of a
business unit.

Tax Expense
Our effective tax rate of approximately 37.5% exceeded the federal statutory
rate of 35% due primarily to the net effect of state income taxes. Our
effective tax rate increased 1.2% for fiscal year 2003 to 37.5% from 36.3% for
fiscal year 2002. Included in tax expense in fiscal year 2002 are certain tax
benefits of approximately $4.3 million resulting primarily from recently
enacted federal income tax rules that provide for a larger tax deduction
associated with our June 2000 divestitures and deferred tax adjustments to
reflect realization of tax deductions for which their probability is no longer
uncertain.

19



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##### Table of Contents



Comparison of Fiscal Year 2002 to Fiscal Year 2001

Revenues
Revenues increased $1.0 billion, or 48%, to $3.1 billion in fiscal year 2002
from $2.1 billion in fiscal year 2001. Internal revenue growth for fiscal year
2002 was 14%, and the remainder from acquisitions.

Revenues in our state and local government segment increased $907.8 million to
$1.3 billion in fiscal year 2002 from $386.4 million in fiscal year 2001.
Internal revenue growth was 62% due primarily to increased revenue in new and
existing contracts in Georgia, Mississippi, and Florida, and increased revenues
from transportation systems and services and welfare and community services
contracts. Acquisition growth is primarily due to the IMS acquisition in early
fiscal 2002 (see Significant Developments  Fiscal Year 2002).

Revenues in our commercial segment increased $27.9 million, or approximately 3%
primarily due to acquisition growth related to the AFSA, Andersen and NPC
acquisitions in fiscal year 2002 (see Significant Developments  Fiscal Year
2002).

Revenues in our federal government segment increased $63.7 million, or
approximately 9%, primarily due to internal growth related to increases in new
and existing defense and desktop services contracts as well as the Department
of Education.

Operating Expense
As a percentage of revenue, operating expenses decreased 2.1% to 86.9% in
fiscal year 2002 from 89.0% in fiscal year 2001. Operating expenses increased
$822.5 million to $2.7 billion in fiscal year 2002. Included in operating
expenses in fiscal year 2001 were the effects of $10.4 million of termination
costs included in rent, lease and maintenance; $2.1 million of litigation costs
and the writedown of property held-for-sale included in other operating
expense. In fiscal year 2002, we ceased the amortization of goodwill pursuant
to the application of SFAS 142.

Wages and benefits increased $445.4 million, or 49%. As a percentage of
revenues, wages and benefits increased 0.3% to 44.1% in fiscal year 2002 from
43.8% in fiscal year 2001 due to increased business process outsourcing
services in our revenue mix. BPO services have a higher component of wages and
benefits than traditional technology outsourcing. BPO services accounted for
approximately 63% of our fiscal year 2002 revenues as compared to 47% in fiscal
year 2001.

Services and supplies increased $289.7 million, or 48%, and remained constant
as a percentage of revenue.

Rent, lease and maintenance expense increased $54.9 million to $278.6 million
in fiscal year 2002. The increase in rent lease and maintenance expense was due
to increased revenue from BPO services in our revenue mix which has a lower
component of rent, lease and maintenance than traditional technology
outsourcing. Included in rent, lease and maintenance in fiscal year 2001 was a
$10.4 million charge related to the termination of certain hardware leases and
disaster recovery contracts.

Depreciation and amortization increased $16.9 million in fiscal year 2002. As
a percentage of revenue, depreciation and amortization decreased 0.9% due to
the application of SFAS 142, offset by increased amortization of customer
related intangible assets. Goodwill amortization was $24.5 million, or 1.2% of
revenue, in fiscal year 2001.

Other operating expenses increased $15.6 million to $34.6 million in fiscal
year 2002. As a percentage of revenue other operating expenses increased 0.2%
due to increased marketing efforts and legal expenses in fiscal year 2002.
Included in other operating expense in fiscal year 2001 was $2.1 million of
litigation costs and the writedown of property held for sale.

Operating Margins
Our operating margins increased 2.1% to 13.1% in fiscal year 2002 due to the
items discussed above.

Interest Expense
Interest expense increased $6.9 million due primarily to the full year impact
of our new issue 3.5% Notes (see Significant Developments  Fiscal Year 2001)
offset by a decrease in interest expense on the 4% Notes that were converted in
the third quarter of fiscal year 2002 (see Significant Developments  Fiscal
Year 2002).

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##### Table of Contents





Other Non-Operating Expense (Income)
Other non-operating expense in fiscal year 2002 includes $8.4 million of
write-downs of long-term cost basis investments, and a $2.3 million loss on the
sale of business unit. Other non-operating income in fiscal 2001 consisted of a
$12.8 million gain on sale of an investment, a gain on a note receivable and
decrease in interest income as a result of the use of excess cash held at June
30, 2001 to fund in part the IMS acquisition in early fiscal year 2002.

Tax Expense
Our effective tax rate of approximately 36.3% exceeded the federal statutory
rate of 35% due primarily to the net effect of state income taxes offset by
certain tax benefits of approximately $4.3 million resulting primarily from
recently enacted federal income tax rules that provide for a larger tax
deduction associated with our June 2000 divestitures and deferred tax
adjustments to reflect realization of tax deductions for which their
probability is no longer uncertain. Our effective tax rate decreased 3.0% from
39.3% in fiscal 2001 due to the application of SFAS 142.

Liquidity and Capital Resources

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

During the year ended June 30, 2003, we generated approximately $545.3 million
in cash flow from operations versus the fiscal year 2002 amount of
approximately $372.0 million. Fiscal year 2003 cash flow from operations
increased 47% over fiscal year 2002.

We believe free cash flow provides another measure of available cash flow after
we have satisfied the capital requirements of our operations. Free cash flow
before additions to other intangible assets was approximately $339.6 million
for fiscal year 2003 versus approximately $227.6 million for fiscal year 2002,
an increase of 49%. Free cash flow before additions to other intangible assets
is measured as operating cash flow (net cash provided by operating activities,
as reported in our consolidated statements of cash flow), less capital
expenditures (purchases of property, equipment and software, net of sales, as
reported in our consolidated statements of cash flow). Free cash flow after
additions to other intangible assets was $291.7 million in fiscal year 2003
compared to $208.3 million in fiscal year 2002, an increase of 40%. The
following table sets forth the calculations of free cash flow (in thousands):

Year ended June 30,2003
    
    2002Net cash provided by operating activities
    
    $
    545,305
    
    
    $
    372,014Purchases of property, equipment and software, net
    
    
    (205,673
    )
    
    
    (144,406
    )Free cash flow before additions to other intangible assets
    
    
    339,632
    
    
    
    227,608Additions to other intangible assets
    
    
    (47,967
    )
    
    
    (19,317
    )Free cash flow after additions to other intangible assets
    
    $
    291,665
    
    
    $
    208,291


During the fiscal year 2003, we used $320.1 million in investing activities.
Investing activities included the purchase of property, equipment and software,
net, which increased from approximately $144.4 million in fiscal year 2002 to
approximately $205.7 million in fiscal year 2003. Our capital expenditures
were 5.4% of total revenues, compared to 4.7% in fiscal year 2002, which we
believe is adequate to support our growing business and to meet contractual
requirements. Our investing activities also included acquisition payments, net
of cash acquired, of $76.8 million and $1.4 billion in fiscal years 2003 and
2002, respectively, and additions to other customer-related intangible assets
of $48.0 million and $19.3 million in fiscal years 2003 and 2002, respectively.

During fiscal year 2003, approximately $207.9 million was used by financing
activities, primarily to pay down debt. Financing activities from fiscal year
2002 included the issuance of 18.4 million shares of our Class A common stock
(adjusted for stock split). The shares were issued at $40.50 per share
yielding proceeds of $714.3 million (net of underwriters fees and other
costs), which were used to repay the $550 million 18-month interim credit
facility incurred to fund the IMS acquisition and a portion of the amount
outstanding under our then existing revolving credit facility.

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##### Table of Contents



We have an $875.0 million unsecured revolving credit facility (Credit
Facility), which matures in December 2005. The Credit Facility provides for
unsecured borrowings at rates based on our credit rating. Currently,
borrowings bear interest at LIBOR (1.12% at June 30, 2003) plus .575%. The
agreement contains certain covenants, including maintaining interest coverage
and debt-to-equity, as defined by the agreement. At June 30, 2003, we were in
compliance with these covenants.

At June 30, 2003, we had $520.9 million of availability under our $875.0
million Credit Facility, after giving effect to outstanding letters of credit
of $176.4 million that secure certain contractual performance and other
obligations. These letters of credit reduce the availability of our Credit
Facility. We had $177.7 million outstanding on our Credit Facility, which is
reflected in long-term debt.

We have certain contracts, primarily in our state and local business that
require us to provide a surety bond or a letter of credit as a guarantee of
performance. As of June 30, 2003, outstanding surety bonds of $302.7 million
and $105.9 million of our outstanding letters of credit secure our performance
of contractual obligations with our clients. In general, we would only be
liable for the amount of these guarantees in the event of default in the
performance of our obligations under each contract, the probability of which we
believe is remote. We believe that we have sufficient capacity in the surety
markets and liquidity from our cash flow and revolving credit facility to meet
ongoing business needs and to respond to future requests for proposals from
state and local governments.

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

On September 2, 2003, we announced that our Board of Directors authorized a
share repurchase program of up to $500 million of our Class A common stock
effective immediately. The program, which is open-ended, will allow us to
repurchase our shares on the open market from time to time in accordance with
the requirements of the SEC, including shares that could be purchased pursuant
to SEC Rule 10b5-1. The number of shares to be purchased and the timing of
purchases will be based on the level of cash and debt balances, general
business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources,
including, but not limited to, cash flow from operations, borrowings under our
existing revolving credit facility, and if consummated, proceeds from the sale
of the majority of our federal government business. As of September 12, 2003,
we have repurchased 250,000 shares for a total cost of approximately $12.6
million.

Our management believes that available cash and cash equivalents, together with
cash generated from operations and available borrowings under our Credit
Facility, will provide adequate funds for our anticipated internal growth
needs, including working capital expenditures. Our management also believes
that cash provided by operations will be sufficient to satisfy all existing
debt and other contractual obligations as they become due. However, we intend
to continue our growth through acquisitions and from time to time to engage in
discussions with potential acquisition candidates. In order to pursue such
opportunities, which could require significant commitments of capital, 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
acquisition and expansion opportunities and how such opportunities will be
financed.

Related Party Transactions

As of June 30, 2002, we held a minority preferred stock interest in DDH
Aviation, Inc., a corporate airplane brokerage company organized in 1997
(DDH). Our Chairman owns a majority voting interest in DDH and our President
and General Counsel, along with our Chairman were directors of DDH. At June
30, 2002, DDH had a $48 million line of credit with Citicorp USA, Inc., for
which we and our Chairman, in exchange for warrants to acquire additional
voting stock, acted as

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partial guarantors. In addition, we obtained access to corporate aircraft at
favorable rates in consideration of our guaranty. We had guaranteed up to
approximately $11.5 million of the line of credit and our Chairman guaranteed
up to approximately $17.5 million of the line of credit.

In July 2002, our Chairman assumed in full our guaranty obligations to Citicorp
and our guaranty to Citicorp was released in full. Our minority preferred
stock interest and warrants (with a recorded value of $100,000 at June 30,
2002) in DDH were cancelled. We have no further ownership interest in DDH.
Our officers, other than the Chairman, are no longer directors of DDH. In the
first quarter of fiscal year 2003, we purchased $1.0 million in prepaid charter
flights at favorable rates from DDH. As of June 30, 2003, we have $0.8 million
remaining in prepaid flights with DDH. During fiscal year 2003, we paid DDH
approximately $0.5 million for maintenance services, chartered
aircraft and equipment.

In August 2001, we purchased a Challenger 600 aircraft from DDH for a purchase
price of $8.5 million, which included interior and exterior refurbishment of
the aircraft. As of June 30, 2002, the purchase price for the aircraft was
paid in full, and refurbishment was near completion. The aircraft was
delivered to us in the first quarter of fiscal year 2003.

Disclosures about Contractual Obligations and Commercial Commitments as of June 30, 2003 (in thousands):

Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    494,690
    
    
    $
    
    
    
    $
    494,690
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    5,414
    
    
    
    1,764
    
    
    
    2,468
    
    
    
    1,182
    
    
    
    Operating leases
    
    
    350,145
    
    
    
    103,357
    
    
    
    128,674
    
    
    
    64,932
    
    
    
    53,182Total Contractual Cash
Obligations
    
    $
    850,249
    
    
    $
    105,121
    
    
    $
    625,832
    
    
    $
    66,114
    
    
    $
    53,182


Amount of Commitment Expiration per PeriodTotalOther Commercial
    
    Amounts
    
    Less thanCommitments
    
    Committed
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    
    After 5 YearsStandby letters of credit
    
    $
    176,428
    
    
    $
    176,428
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety Bonds
    
    
    302,682
    
    
    
    277,009
    
    
    
    25,661
    
    
    
    12
    
    
    
    Total Commercial Commitments
    
    $
    479,110
    
    
    $
    453,437
    
    
    $
    25,661
    
    
    $
    12
    
    
    $
    


We are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
June 30, 2003, the maximum aggregate amount of the outstanding contingent
obligations is approximately $30.9 million. Upon satisfaction of the specified
contractual criteria, any such payment would result in a corresponding increase
in goodwill.

Our Education Services business, which is included in our commercial segment,
performs third party student loan servicing in the Federal Family Education
Loan program (FFEL) on behalf of various financial institutions. At June 30,
2003, we serviced a FFEL portfolio of 1.3 million loans with an outstanding
principal balance of more than $14.2 billion. Some servicing agreements
contain provisions that, under certain circumstances, require us to purchase
the loans from the investor if the loan guaranty has been permanently
terminated as a result of a loan default caused by our servicing error. If
defaults caused by us are cured during an initial period, any obligation we may
have to purchase these loans expires. Loans that we purchase may be
subsequently cured; the guaranty reinstated and we repackage the loans for sale
to third parties.

We evaluate the collectibility of any purchased loans and establish a reserve
for potential losses, or default liability reserve, through a charge to the
provision for loss on defaulted loans purchased. The reserve is evaluated
periodically and adjusted based upon managements analysis of the historical
performance of the purchased loans. This reserve was approximately $4.2 million
at June 30, 2003.

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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 involve significant judgments and
estimates used in the preparation of our consolidated financial statements.

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

During fiscal year 2003, approximately 60% of our revenue is recognized based
on transaction volumes, approximately 12% is related to time and material
contracts, approximately 14% is related to cost reimbursable contracts,
approximately 7% of our revenues are recognized using percentage-of-completion
accounting and the remainder is fixed fee based.

Generally, information technology processing revenues are recognized as
services are provided to the client. Revenues from annual maintenance contracts
are deferred and recognized ratably over the maintenance period. Revenues from
hardware sales are recognized upon delivery to the client and when
uncertainties regarding customer acceptance have expired. Revenues for business
process outsourcing services are recognized as services are rendered, generally
on the basis of the number of accounts or transactions processed.

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

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

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

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

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

Valuation of goodwill and
intangibles. Due to the fact that we are primarily a
services company, our business acquisitions typically result in significant
amounts of goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible expense we could incur as a
result of an impairment. The determination of the value of goodwill and other
intangibles requires us to make estimates and assumptions about future business
trends and growth. We continually evaluate whether events and circumstances
have occurred that indicate the balance of goodwill or intangible assets may
not be recoverable. In evaluating impairment, we estimate the sum of expected
future cash flows derived from the goodwill or intangible asset. Such
evaluation is significantly impacted by estimates and assumptions of future
revenues, costs and expenses and other factors. If an event occurs which would
cause us to revise our estimates and assumptions used in analyzing the value of
our goodwill or other intangibles, such revision could result in an impairment
charge that could have a material impact on our financial results.

Allowance for doubtful accounts. We make estimates of the collectibility of our
accounts receivable. We specifically analyze accounts receivable and
historical bad debts, customer credit-worthiness, current economic trends, and
changes in our customer payment terms and collection trends when evaluating the
adequacy of our allowance for doubtful accounts. Any change in the assumptions
used in analyzing a specific account receivable may result in additional
allowance for doubtful accounts being recognized in the period in which the
change occurs.

New Accounting Standards

In May 2003, the EITF issued EITF 01-08  Determining Whether an Arrangement
Contains a Lease. EITF 01-08 provides guidance on how to determine whether an
arrangement contains a lease that is within the scope of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 13,
Accounting for Leases. The guidance in EITF 01-08 is based on whether the
arrangement conveys to the purchaser (lessee) the right to use a specific
asset. EITF 01-08 is effective for arrangements entered into or modified on or
after May 28, 2003. We do not believe that the adoption of EITF 01-08 will
have a material impact on our financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003. The
adoption of SFAS 150 had no effect on our financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, which addresses
the criteria for consolidation by business enterprises of variable interest
entities. We do not have variable interest entities and therefore, FIN 46 will
have no impact on our financial position or results of operations.

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In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS 148). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The adoption of SFAS 148
had no effect on our financial position or results of operations.

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

Risks Related to our Business

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

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

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

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

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

Failure to properly manage our
operations and our growth. We have rapidly
expanded our operations in recent years. We intend to continue expansion in the
foreseeable future to pursue existing and potential market opportunities. This
rapid growth places a significant demand on our management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures, and controls on a timely basis. If we fail
to implement these systems, procedures and controls on a timely basis, we may
not be able to service our clients needs, hire and retain new

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employees, pursue new business, complete future acquisitions or operate our
businesses effectively. We could also trigger contractual credits to clients.
Failure to properly integrate acquired operations with vendors systems could
result in increased cost.

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

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

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

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

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

Intellectual property infringement
claims. We rely heavily on the use of
intellectual property. We do not own the majority of the software that we use
to run our business; instead we license this software from a small number of
primary vendors. If these vendors assert claims that we or our clients are
infringing on their software or related intellectual property, we could incur
substantial costs to defend these claims, which could have a material effect on
our profitability and cash flow. In addition, if any of our vendors
infringement claims are ultimately successful, our vendors could require us (1)
to cease selling or using products or services that incorporate the challenged
software or technology, (2) to obtain a license or additional licenses from our
vendors, or (3) to redesign our products and services which rely on the
challenged software or technology. If we are unsuccessful in the defense of
an infringement claim and our vendors require us to initiate any of the above
actions, then such actions could have a material adverse effect on our
business, financial condition, results of operations and cash flow.

Federal regulations relating to
confidentiality of health data. In 1996,
Congress passed the Health Insurance Portability and Accountability Act
(HIPAA) and as required therein, the Secretary of Health and Human Services
(HHS) has established standards for information sharing, security and
confidentiality with regard to health information of individuals. We process
individually identifiable health information for many of our clients. We and
our clients are required to comply with HIPAA and we will be required to comply
with HIPAA for individually identifiable health information which we maintain
for our employees. Health information privacy regulations promulgated under
HIPAA took effect on April 14, 2003. On or prior to

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

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

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

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

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

Servicing Risks. We service (for various lenders and under various service
agreements) a portfolio of over $14 billion of loans made under the Federal
Family Loan Education Loan Program, which loans are guaranteed by a federal
government agency. If a loan is in default, then a claim is made upon the
guarantor. If the guarantor denies the claim because of a servicing error,
then under certain of the servicing agreements we may be required to purchase
the loan from the lender. Upon purchase of the loan, we attempt to cure the
servicing errors and either sell the loan back to the guarantor (which must
occur within a specified period of time) or sell the loan on the open market to
a third party. We are subject to the risk that we may be unable to cure the
servicing errors or sell the loan on the open market. Our reserves, which are
based on historical information, may be inadequate if our servicing performance
results in the requirement that we repurchase a substantial number of loans,
which repurchase could have a material adverse impact on our cash flow and
profitability.

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

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have fixed rate and variable rate debt instruments. Our variable rate debt
instruments are subject to market risk from changes in interest rates. During
the first half of fiscal year 2002, in order to manage interest costs and
exposure to changing interest rates related to our then existing $450 million
revolving line of credit, we held two interest rate hedges initiated in
December 1998. Each hedge was designated a cash flow hedge and was structured
such that we paid a fixed rate of interest of 4.54% on amounts owed under the
revolving line of credit up to the notional amount, and received a floating
rate of interest based on one month LIBOR. The notional amount of the two
hedges totaled $100 million and expired in December 2001. Changes in the fair
value of the interest rate hedges, net of tax effect, is reflected in
accumulated other comprehensive income.

We held a single investment in a marketable security during fiscal year 2002.
To protect ourselves from the volatility of the value of this marketable
security investment, we entered into a no-cost collar agreement in June 2001,
which matured in June 2002. The collar, a fair value hedge, was structured so
that all fluctuations in the price of the marketable security above or below
100% or 102.5% of its value on the date the collar was entered into are hedged.
This marketable security investment was liquidated as of June 30, 2002, and the
related collar was terminated. We do not hold or issue derivative financial
instruments for trading purposes and are not a party to any leveraged
derivative transactions.

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

29



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##### Table of Contents









Item 8. Financial Statements
    
    PageReport of Independent Auditors
    
    
    31Consolidated Balance Sheets
    
    
    32Consolidated Statements of Income
    
    
    33Consolidated Statements of Changes in Stockholders Equity
    
    
    34Consolidated Statements of Cash Flows
    
    
    35Notes to Consolidated Financial Statements
    
    
    36-58


30



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##### Table of Contents



Report of Independent Auditors

To the Board of Directors and Stockholders of   Affiliated
Computer Services, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders equity and cash
flows present fairly, in all material respects, the financial position of
Affiliated Computer Services, Inc. and its subsidiaries at June 30, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in connection with its adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, effective July 1,
2001.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
July 29, 2003, except as to Note 19,
which is as of September 2, 2003

31



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##### Table of Contents



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

June 30,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51,170
    
    
    $
    33,814Accounts receivable, net
    
    
    835,478
    
    
    
    736,471Inventory
    
    
    6,245
    
    
    
    9,740Prepaid expenses and other current assets
    
    
    86,605
    
    
    
    94,464Total current assets
    
    
    979,498
    
    
    
    874,489Property, equipment and software, net
    
    
    478,212
    
    
    
    394,830Goodwill
    
    
    1,905,878
    
    
    
    1,846,482Other intangibles, net
    
    
    265,091
    
    
    
    234,287Other assets
    
    
    70,026
    
    
    
    53,479Total assets
    
    $
    3,698,705
    
    
    $
    3,403,567LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    58,376
    
    
    $
    72,858Accrued compensation and benefits
    
    
    132,027
    
    
    
    125,290Other accrued liabilities
    
    
    272,578
    
    
    
    210,003Income taxes payable
    
    
    17,057
    
    
    
    20,452Deferred taxes
    
    
    26,054
    
    
    
    7,344Current portion of long-term debt
    
    
    1,764
    
    
    
    1,330Current portion of unearned revenue
    
    
    49,620
    
    
    
    48,636Total current liabilities
    
    
    557,476
    
    
    
    485,913Convertible notes
    
    
    316,990
    
    
    
    316,990Long-term debt
    
    
    181,350
    
    
    
    391,243Deferred taxes
    
    
    176,484
    
    
    
    95,394Other long-term liabilities
    
    
    37,217
    
    
    
    18,607Total liabilities
    
    
    1,269,517
    
    
    
    1,308,147Commitments and contingencies (See Notes 14 and 19)Stockholders equity:Class A common stock, $.01 par value, 500,000 shares authorized,
126,607 and 125,424 shares outstanding, respectively
    
    
    1,266
    
    
    
    1,254Class B common stock, $.01 par value, 14,000 shares authorized,
6,600 shares outstanding
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,358,418
    
    
    
    1,330,533Accumulated other comprehensive income, net
    
    
    (971
    )
    
    
    Retained earnings
    
    
    1,070,409
    
    
    
    763,567Total stockholders equity
    
    
    2,429,188
    
    
    
    2,095,420Total liabilities and stockholders equity
    
    $
    3,698,705
    
    
    $
    3,403,567


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

32



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##### Table of Contents



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

Year ended June 30,2003
    
    2002
    
    2001Revenues
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    2,063,559Operating expenses:Wages and benefits
    
    
    1,716,946
    
    
    
    1,350,057
    
    
    
    904,684Services and supplies
    
    
    994,410
    
    
    
    888,497
    
    
    
    598,797Rent, lease and maintenance
    
    
    351,855
    
    
    
    278,621
    
    
    
    223,679Depreciation and amortization
    
    
    152,128
    
    
    
    110,486
    
    
    
    93,617Other operating expenses
    
    
    52,586
    
    
    
    34,625
    
    
    
    19,056Total operating expenses
    
    
    3,267,925
    
    
    
    2,662,286
    
    
    
    1,839,833Operating income
    
    
    519,281
    
    
    
    400,632
    
    
    
    223,726Interest expense
    
    
    25,194
    
    
    
    30,619
    
    
    
    23,742Other non-operating expense (income), net
    
    
    3,140
    
    
    
    9,557
    
    
    
    (21,076
    )Pretax profit
    
    
    490,947
    
    
    
    360,456
    
    
    
    221,060Income tax expense
    
    
    184,105
    
    
    
    130,860
    
    
    
    86,768Net income
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Earnings per share:Basic
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35Diluted
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23Shares used in computing earnings per share:Basic
    
    
    132,445
    
    
    
    118,646
    
    
    
    99,758Diluted
    
    
    143,430
    
    
    
    137,464
    
    
    
    116,456


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

33



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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands)

Common StockAccumulatedClass A
    
    Class B
    
    Additional
    
    
    
    
    
    Other
    
    Treasury StockPaid-in
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Income, Net
    
    Shares
    
    Amount
    
    TotalBalance at June 30, 2000
    
    
    46,281
    
    
    $
    463
    
    
    
    3,300
    
    
    $
    33
    
    
    $
    321,525
    
    
    $
    400,200
    
    
    $
    
    
    
    
    (246
    )
    
    $
    (10,844
    )
    
    $
    711,377Comprehensive income:Unrealized gains on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    84Interest rate hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    (216
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,292Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,160Employee stock transactions
and related tax benefits
    
    
    1,000
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    29,179
    
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    10,844
    
    
    
    40,033Conversion of 4%
Convertible
Subordinated Notes
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )Balance at June 30, 2001
    
    
    47,282
    
    
    
    473
    
    
    
    3,300
    
    
    
    33
    
    
    
    350,767
    
    
    
    534,374
    
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    885,515Comprehensive income:Unrealized gains on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    (84
    )Interest rate hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    216Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,596Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,728Employee stock transactions
and related tax benefits
    
    
    1,137
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    38,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,004Equity offering
    
    
    9,200
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    714,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714,292Two-for-one stock dividend
    
    
    57,024
    
    
    
    570
    
    
    
    3,300
    
    
    
    33
    
    
    
    (603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of 4%
Convertible Subordinated
Notes
    
    
    10,781
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    227,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227,284Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )Balance at June 30, 2002
    
    
    125,424
    
    
    
    1,254
    
    
    
    6,600
    
    
    
    66
    
    
    
    1,330,533
    
    
    
    763,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,095,420Comprehensive income:Foreign currency
translation gains
(losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (971
    )
    
    
    
    
    
    
    
    
    
    
    (971
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,842Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,871Employee stock transactions
and related tax benefits
    
    
    1,183
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    27,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,788Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Balance at June 30, 2003
    
    
    126,607
    
    
    $
    1,266
    
    
    
    6,600
    
    
    $
    66
    
    
    $
    1,358,418
    
    
    $
    1,070,409
    
    
    $
    (971
    )
    
    
    
    
    
    $
    
    
    
    $
    2,429,188


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

34



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

Year ended June 30,2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    152,128
    
    
    
    110,486
    
    
    
    93,617Contract inducement amortization
    
    
    7,346
    
    
    
    887
    
    
    
    Provision for uncollectible accounts receivable
    
    
    4,838
    
    
    
    3,283
    
    
    
    2,062Impairment of long-term investments
    
    
    3,375
    
    
    
    8,449
    
    
    
    Gain on collection of note receivable
    
    
    
    
    
    
    
    
    
    
    (1,713
    )Gain on sale of investment
    
    
    
    
    
    
    
    
    
    
    (12,785
    )(Gain) loss on sale of business units
    
    
    (1,585
    )
    
    
    1,841
    
    
    
    Other non-cash activities
    
    
    5,575
    
    
    
    1,012
    
    
    
    526Deferred income tax expense
    
    
    100,851
    
    
    
    55,821
    
    
    
    37,359Tax benefit of stock options
    
    
    16,124
    
    
    
    21,951
    
    
    
    20,649Changes in assets and liabilities, net of effects from acquisitions:Increase in accounts receivable
    
    
    (100,643
    )
    
    
    (115,806
    )
    
    
    (47,807
    )(Increase) decrease in inventory
    
    
    2,616
    
    
    
    (744
    )
    
    
    (1,160
    )(Increase) decrease in prepaid expenses and other current assets
    
    
    3,773
    
    
    
    2,762
    
    
    
    (2,965
    )(Increase) decrease in other assets
    
    
    (15,585
    )
    
    
    (6,570
    )
    
    
    3,449Increase (decrease) in accounts payable
    
    
    (15,867
    )
    
    
    26,252
    
    
    
    (11,273
    )Increase in accrued compensation and benefits
    
    
    787
    
    
    
    7,209
    
    
    
    13,190Increase (decrease) in other accrued liabilities
    
    
    64,502
    
    
    
    12,975
    
    
    
    (23,357
    )Increase (decrease) in income taxes payable
    
    
    (3,350
    )
    
    
    13,118
    
    
    
    (52,907
    )Increase (decrease) in other long-term liabilities
    
    
    1,468
    
    
    
    (638
    )
    
    
    (1,069
    )Increase (decrease) in unearned revenue
    
    
    12,110
    
    
    
    130
    
    
    
    (8,194
    )Total adjustments
    
    
    238,463
    
    
    
    142,418
    
    
    
    7,622Net cash provided by operating activities
    
    
    545,305
    
    
    
    372,014
    
    
    
    141,914Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (205,673
    )
    
    
    (144,406
    )
    
    
    (99,070
    )Payments for acquisitions, net of cash acquired
    
    
    (76,838
    )
    
    
    (1,425,529
    )
    
    
    (173,402
    )Additions to other intangible assets
    
    
    (47,967
    )
    
    
    (19,317
    )
    
    
    (21,695
    )Proceeds from (payments on) divestitures, net of transaction costs
    
    
    4,093
    
    
    
    (5,887
    )
    
    
    202,718Purchases of investments
    
    
    
    
    
    
    (4,129
    )
    
    
    (500
    )Proceeds from sale of investments
    
    
    466
    
    
    
    700
    
    
    
    17,100Additions to notes receivable
    
    
    (3,478
    )
    
    
    (3,577
    )
    
    
    (3,781
    )Proceeds from notes receivable
    
    
    9,314
    
    
    
    3,981
    
    
    
    9,492Net cash used in investing activities
    
    
    (320,083
    )
    
    
    (1,598,164
    )
    
    
    (69,138
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    927,762
    
    
    
    1,279,210
    
    
    
    674,893Payments of long-term debt
    
    
    (1,146,561
    )
    
    
    (992,510
    )
    
    
    (566,912
    )Proceeds from equity offering, net of transaction costs
    
    
    
    
    
    
    714,292
    
    
    
    Employee stock transactions
    
    
    14,243
    
    
    
    17,901
    
    
    
    17,829Other, net
    
    
    (3,310
    )
    
    
    (1,387
    )
    
    
    (649
    )Net cash provided (used) by financing activities
    
    
    (207,866
    )
    
    
    1,017,506
    
    
    
    125,161Net increase (decrease) in cash and cash equivalents
    
    
    17,356
    
    
    
    (208,644
    )
    
    
    197,937Cash and cash equivalents at beginning of year
    
    
    33,814
    
    
    
    242,458
    
    
    
    44,521Cash and cash equivalents at end of year
    
    $
    51,170
    
    
    $
    33,814
    
    
    $
    242,458


See supplemental cash flow information in Notes 2, 5, 6, 7, and 8.
The accompanying notes are an integral part of these consolidated financial statements.

35



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##### Table of Contents



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

1. Business and Summary of Significant Accounting Policies

Description of business and basis of presentation

We are a Fortune 500 company comprised of more than 40,000 people in nearly 100
countries. We operate in three business segments: commercial, state and local
governments and federal government, and provide business process, technology
outsourcing, and system integration solutions to our clients. We were
incorporated on June 8, 1988.


The consolidated financial statements are comprised of our accounts and our
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Our fiscal year ends on
June 30. The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America that require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, the reported amount of revenues and expenses
during the reporting period, as well as the accompanying notes. These estimates
are based on information available to us as of the date of the financial
statements. Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents consist primarily of cash, short-term investments in
commercial paper, and money market investments that have an initial maturity of
three months or less. Cash equivalents are valued at cost, which approximates
market.


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.


Inventory

Inventories consist primarily of micrographic supplies and equipment, bindery
materials, photo enforcement equipment, network computer hardware and computer
maintenance parts, which are generally recorded at the lower of cost or market
(net realizable value) using the first-in, first-out method.


Property, equipment and software, net

Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which for
equipment ranges primarily from three to twelve years and for buildings and
improvements up to forty years. Leasehold improvements are depreciated over
the shorter of the term of the lease or the estimated life. Depreciation
expense on property and equipment was approximately $98.8 million, $74.5
million and $50.7 million for the fiscal years ended June 30, 2003, 2002 and
2001, respectively.


Costs incurred to develop computer software to be sold as a separate product
are capitalized only after technological feasibility has been established.
Purchased computer software is amortized using the straight-line method over
expected useful lives, which range from two to five years. Amortization of
computer software was approximately $23.8 million, $13.9 million and $6.0
million in fiscal years 2003, 2002 and 2001, respectively.

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

In accordance with Statement of Position 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use (SOP 98-1), certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software.
During fiscal years 2003, 2002 and 2001, we capitalized approximately $44.0
million, $15.8 million and $7.7 million, respectively, in software costs under
SOP 98-1, which are being amortized over expected useful lives, which range
from three to five years. These capitalized amounts include internal costs of
approximately $19.9 million, $12.1 million and $1.3 million and external costs
of approximately $24.1 million, $3.7 million and $6.4 million for fiscal years
2003, 2002 and 2001, respectively. These costs were incurred in the
development of our proprietary software used in connection with our long-term
client relationships.

Goodwill

In June 2001, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 142 addresses the accounting and
reporting of acquired goodwill and other intangible assets. SFAS 142
discontinues amortization of acquired goodwill and instead requires annual
impairment testing of acquired goodwill. Intangible assets are amortized over
their useful economic life and tested for impairment in accordance with
Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets.


We adopted SFAS 142 effective July 1, 2001. SFAS 142 has had a significant
positive impact on our financial results based on the historical amortization
of goodwill. During fiscal year 2001, we had after-tax goodwill amortization
expense of approximately $20.7 million. There is no goodwill amortization
expense for fiscal years 2003 and 2002 in accordance with SFAS 142.

Due to the fact that we are primarily a services company, our business
acquisitions typically result in significant amounts of goodwill and other
intangible assets, which affect the amount of future period amortization
expense and possible expense we could incur as a result of an impairment. The
determination of the value of goodwill and other intangibles requires us to
make estimates and assumptions about future business trends and growth. If an
event occurs that could cause us to revise our estimate and assumptions used in
analyzing the value of our goodwill or other intangibles, such revision could
result in an impairment charge that could have a material impact on our
financial results.

Other intangible assets

Other intangible assets consist primarily of acquired customer-related
intangibles and contract and migration costs related to new business activity,
both of which are recorded at cost and amortized using the straight-line method
over the contract terms. Acquired customer-related intangibles, customer
contract costs and other intangibles are amortized over a weighted average term
of approximately 8 years. For the CyberRep acquisition in fiscal year 2003 and
the IMS, Andersen, and AFSA acquisitions in fiscal year 2002 (as described in
Note 2), we obtained a third-party valuation of the intangible assets. The
determination of the value of other intangibles requires us to make estimates
and assumptions about future business trends and growth. If an event occurs
which would cause us to revise our estimates and assumptions used in analyzing
the value of our other intangibles, such revision could result in an impairment
charge that could have a material impact on our financial results.


Other assets

Other assets primarily consist of long-term deposits, deferred debt issuance
costs and long-term investments accounted for using the cost method. The
deferred debt issuance costs are being amortized using the straight-line method
over the life of the related debt, which approximates the effective interest
method. It is our policy to periodically review the net realizable value of our
long-term investments through an assessment of the recoverability of the
carrying amount of each investment. Each investment is reviewed to determine if
events or changes in circumstances have occurred which indicate that the
recoverability of the carrying amount may be uncertain. In the event that an
investment is found to be carried at an amount in excess of its recoverable
amount, the asset is adjusted for impairment to a level commensurate with the
recoverable amount of the underlying asset.


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

Revenue recognition

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


During fiscal year 2003, approximately 60% of our revenue is recognized based
on transaction volumes, approximately 12% is related to time and material
contracts, approximately 14% is related to cost reimbursable contracts,
approximately 7% of our revenues are recognized using percentage-of-completion
accounting and the remainder is fixed fee based.

Generally, information technology processing revenues are recognized as
services are provided to the client. Revenues from annual maintenance contracts
are deferred and recognized ratably over the maintenance period. Revenues from
hardware sales are recognized upon delivery to the client and when
uncertainties regarding customer acceptance have expired. Revenues for business
process outsourcing services are recognized as services are rendered, generally
on the basis of the number of accounts or transactions processed.

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

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

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

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

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

Income taxes

Deferred income taxes provided in the accompanying financial statements are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the years in which
such differences are expected to reverse. See Note 8 for discussion of income
taxes.


Earnings per share

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the combination of dilutive common share equivalents and the
weighted average number of common shares outstanding during the period. All
share and per share information is presented giving effect to the two-for-one
stock split of our Class A and Class B common shares that occurred February 22,
2002 (see Note 9). See Note 11 for the computation of earnings per share.


Stock-based compensation

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS 148). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. We adopted the
disclosure requirements of SFAS 148 effective for the quarter ended March 31,
2003.


We follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) in accounting for our stock-based compensation
plans. Under APB 25, no compensation expense is recognized for our stock-based
compensation plans since the exercise prices of awards under our plans are at
current market prices of our stock on the date of grant. Had compensation cost
for our stock-based compensation plans been determined based on the fair value
at the grant date under those plans consistent with the fair value method of
SFAS 123, our net income and earnings per share would have been reduced to the
pro forma amounts indicated below:

For the year ended June 30,2003
    
    2002
    
    2001Net IncomeAs reported
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Less: Pro forma employee
compensation cost of
stock-based compensation
plans, net of tax
    
    
    17,570
    
    
    
    11,936
    
    
    
    8,862Pro forma
    
    $
    289,272
    
    
    $
    217,660
    
    
    $
    125,430Basic earnings per shareAs reported
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35Pro forma
    
    $
    2.18
    
    
    $
    1.83
    
    
    $
    1.26Diluted earnings per shareAs reported
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23Pro forma
    
    $
    2.09
    
    
    $
    1.68
    
    
    $
    1.16


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

The fair value of each option grant was estimated at the date of grant using a
separate Black-Scholes option pricing calculation for each grant. The
following weighted average assumptions were used for grants in fiscal 2003,
2002 and 2001: dividend yield of 0% in all years for all plans; volatility of
34.65%, 34.94% and 35.84%, for fiscal 2003, 2002, and 2001, respectively, for
all plans; risk-free interest rates of 3.74%, 4.36% and 4.76% for fiscal 2003,
2002, and 2001, respectively, for all plans; and weighted average expected
option life of 5.5 years for the 1997 and 1988 Plans and 3 years for the 1991
Plan for all years presented. The average fair values of the options granted
during fiscal 2003, 2002, and 2001 are estimated at $14.49, $16.01 and $9.93
respectively, for the combined plans. The fair values have been adjusted to
reflect the February 2002 two-for-one stock split.

Reclassifications

Certain reclassifications have been made to prior period financial statements
to conform to current presentation.


2. Business Combinations

From our inception through June 30, 2003, we have acquired several businesses
in the information technology services and business process outsourcing
industries. Our recent acquisition activity is summarized as follows (excluding
transaction costs):

Year ended June 30,
    
    2003
    
    2002
    
    2001Purchase consideration (in thousands):Net cash paid
    
    $
    65,395
    
    
    $
    1,405,009
    
    
    $
    166,108Amounts due to seller
    
    
    325
    
    
    
    14,740
    
    
    
    1,536Liabilities assumed
    
    
    17,089
    
    
    
    188,699
    
    
    
    19,220Fair value of assets acquired
(including intangibles)
    
    $
    82,809
    
    
    $
    1,608,448
    
    
    $
    186,864


During fiscal 2003, we acquired five companies, the most significant of which
was the acquisition of CyberRep, Inc. (CyberRep) in January 2003. CyberRep,
which is included in our commercial segment, provides customer care and
customer relationship management services for the telecommunications, wireless
communications, technology, and consumer products industries. The transaction
was valued at approximately $42 million plus transaction costs, with assets
acquired of $56.6 million and liabilities assumed of $14.9 million. We
recorded goodwill of $33.6 million, which is expected to be fully deductible
for tax purposes, and $5.5 million in customer related intangible assets, which
are attributable to customer relationships with an aggregate anticipated useful
life of approximately 7 years. CyberReps operating results are included in our
consolidated financial statements from the effective date of the acquisition,
January 1, 2003. We believe this transaction expands our suite of business
process outsourcing solutions for commercial clients worldwide by enhancing
high-volume, customer care center capability and CRM business process
outsourcing solutions for Fortune 500 companies. We also completed four other
acquisitions during fiscal 2003, all of which were included in our state and
local government segment. These acquisitions are not considered material to
our results of operations, either individually or in the aggregate; therefore,
no pro forma information is presented.

During fiscal year 2002, we acquired eight companies, the most significant of
which were the acquisitions of Lockheed Martin IMS Corporation (IMS) in
August 2001 and AFSA Data Corporation (AFSA) in June 2002.

We acquired 100% of the stock of IMS, a wholly-owned subsidiary of Lockheed
Martin Corporation, (now known as ACS State and Local Solutions), for
approximately $825 million plus related transaction costs. The acquisition was
funded from a $550 million 18-month interim credit facility, borrowings from
our then existing revolving credit facility, and existing cash on hand. This
interim credit facility was repaid in October 2001 with the proceeds from the
equity offering of 18.4 million shares of our Class A common stock at $40.50
per share (see Note 9). IMS results have been included in our consolidated
financial statements from the effective date of the acquisition, August 1,
2001. IMS provides business process outsourcing services to more than 230
state and local government agencies in 45 U.S. states, the District of
Columbia, Canada, Australia, and Europe. IMS specializes in child support
enforcement, welfare and community services, electronic toll collection, and
other intelligent transportation services involving the trucking industry,
photo enforcement of red-light and speeding violations, parking management, and
information technology outsourcing. We believe the acquisition of IMS
solidifies ACS as a leader in technology-based outsourcing solutions to state
and local government agencies.

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

The acquisition was accounted for under the purchase method of accounting with
assets acquired of $934.1 million and liabilities assumed of $109.1 million.
The purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair value at July 31, 2001 as follows (in thousands):

Current assets
    
    $
    111,561Property, equipment and software
    
    
    50,972Other assets
    
    
    2,826Intangible assets
    
    
    64,300Goodwill
    
    
    704,392Total assets acquired
    
    
    934,051Current liabilities
    
    
    109,051Total liabilities assumed
    
    
    109,051Net assets acquired
    
    $
    825,000


The total amount of goodwill is expected to be fully deductible for tax
purposes. Software of $41.5 million is included in property, equipment and
software and has an anticipated useful life ranging from 2 to 10 years. The
$64.3 million of acquired intangible assets is attributable to customer
relationships with an aggregate anticipated useful life of approximately 11
years.

In June 2002 we acquired AFSA, a subsidiary of FleetBoston Financial
Corporation, for approximately $410 million plus related transaction costs.
The acquisition was funded with a combination of a $375 million 18-month
interim credit facility, borrowings from our then existing revolving credit
facility, and existing cash on hand. AFSA is the nations largest educational
services company, servicing a student loan portfolio of 8.1 million borrowers
with outstanding loans of approximately $85 billion, and this acquisition
expands our offerings in the education services market. Additionally, AFSA is
a leading business process outsourcer for federal, state, and local governments
for a variety of health and human services programs, including Medicare,
Medicaid, childrens health insurance programs (CHIP), and welfare and
community services.

The acquisition was accounted for under the purchase method of accounting with
assets acquired of $488.6 million and liabilities assumed of $54.7 million.
The purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair value at June 1, 2002 as follows (in thousands):

Current assets
    
    $
    83,855Property, equipment and software
    
    
    37,440Other assets
    
    
    5,475Intangible assets
    
    
    48,331Goodwill
    
    
    313,487Total assets acquired
    
    
    488,588Current liabilities
    
    
    54,678Total liabilities assumed
    
    
    54,678Net assets acquired
    
    $
    433,910


The total amount of goodwill is expected to be fully deductible for tax
purposes. Software of $17.6 million is included in property, equipment and
software and has an anticipated useful life of approximately 6 years. The
$48.3 million of acquired intangible assets is primarily attributable to
customer relationships with an aggregate anticipated useful life of
approximately 11 years and non-compete agreements with amortization periods of
approximately 5 years.

In May 2002, we acquired the finance and accounting business process
outsourcing unit of Andersen Worldwide (Andersen). Included in this
acquisition are contracts with General Motors (GM) and the University of
Phoenix (the University). Under a new 10-year agreement with GM, we will
provide transactional accounting services such as payroll processing,
disbursement processing, dealer accounting, accounts receivable processing,
lease and subsidiary accounting, and expense reporting in the United States and
Europe. Under the arrangement with the University, we will provide student
financial aid business process outsourcing services to the University including
federal eligibility determinations, loan and grant processing,

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

and disbursement of student aid as well as other support services related to
student financial aid processing. The acquisition was valued at $65.2 million
plus related transaction costs, with assets acquired of $79.0 million and
liabilities assumed of $13.8 million. We recorded goodwill of $58.7 million
(which is fully deductible for tax purposes) and $9.1 million in customer
related intangible assets, which are attributable to customer relationships
with lives of three to ten years. Andersens operating results are included in
our consolidated financial statements from the effective date of the
acquisition, May 1, 2002 for the domestic operations and June 1, 2002 for the
foreign operations. This acquisition is not considered material to our results
of operations; therefore, no pro forma information is presented.

In August 2001, we acquired the business process outsourcing services unit of
National Processing Company (NPC). NPC provides healthcare claims
processing, credit card application processing, and airline lift ticket
processing. As part of the transaction, we acquired all of NPCs offshore
operations in Jamaica, the Dominican Republic, Barbados, and a majority of
NPCs Mexican operations. The transaction value was $43 million plus related
transaction costs, with assets acquired of $50.3 million and liabilities
assumed of $7.3 million. We recorded goodwill of $25.8 million of which 61% is
fully deductible for tax purposes and $2.8 million in customer related
intangible assets, which are attributable to customer relationships with an
aggregate anticipated useful life of approximately 3 years. NPCs operating
results are included in our consolidated financial statements from the
effective date of the acquisition, August 1, 2001. This acquisition is not
considered material to our results of operations; therefore, no pro forma
information is presented.

We completed four other acquisitions during fiscal 2002, two of which were
included in our commercial segment, one in our state and local governments
segment, and one in our federal government segment. These acquisitions are not
considered material to our results of operations either individually or in the
aggregate; therefore, no pro forma information is presented.

During fiscal year 2001, we acquired five companies. The most significant of
these increased our presence in the state and local government sector. We
acquired the Global Government Solutions division of Systems & Computer
Technology Corporation, which delivers state and local government outsourcing
solutions. We also acquired Business Resources Corporation, which provides
outsourced records management, document workflow imaging systems and services,
and real estate title plant services to state and local governments. These
acquisitions are not considered material to our results of operations either
individually or in the aggregate; therefore, no pro forma information is
presented.

We are obligated to make certain contingent payments to former owners based on
the achievement of specified profit levels in conjunction with certain
acquisitions. During fiscal 2003, we made contingent consideration payments of
$8.0 million related to acquisitions completed in prior years. During fiscal
2002, we made no contingent consideration payments related to acquisitions
completed in prior years. As of June 30, 2003, the maximum aggregate amount of
the outstanding contingent obligations is approximately $30.9 million, none of
which has been earned to date. Any such payments result in a corresponding
increase in goodwill.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents a summary of
our consolidated results of operations as if the IMS and AFSA acquisitions had
occurred at the beginning of the periods presented and are not necessarily
indicative of future results or actual results that would have been achieved
had the acquisitions occurred at the beginning of the periods presented (in
thousands, except per share amounts). Pro forma information for these
acquisitions is not presented for fiscal year 2003 because there is no
difference between pro forma and reported financial information.

For the years endedJune 30,2002
    
    2001Revenue
    
    $
    3,267,517
    
    
    $
    2,835,551Net income
    
    
    256,268
    
    
    
    181,811Earnings per common share:Basic
    
    $
    2.16
    
    
    $
    1.82Diluted
    
    $
    1.96
    
    
    $
    1.64


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

3. Accounts Receivable

The components of accounts receivable are as follows (in thousands):

June 30,2003
    
    2002Amounts Billed or Billable:State and local governments
    
    $
    303,082
    
    
    $
    245,136Commercial
    
    
    204,386
    
    
    
    207,444Federal government
    
    
    169,622
    
    
    
    185,764677,090
    
    
    
    638,344Amounts Unbilled:Amounts not yet billed
    
    
    159,997
    
    
    
    100,174Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts
    
    
    4,445
    
    
    
    3,608Contract retainages not currently billable
    
    
    1,186
    
    
    
    1,301165,628
    
    
    
    105,083Total accounts receivable
    
    
    842,718
    
    
    
    743,427Allowance for doubtful accounts
    
    
    (7,240
    )
    
    
    (6,956
    )$
    835,478
    
    
    $
    736,471


Unbilled amounts reflect those amounts that are associated with percentage of
completion accounting, governmental holdbacks, and other unbilled amounts not
currently billable due to contractual provisions. Of the above, unbilled
amounts at June 30, 2003, approximately $77.7 million is not expected to be
billed and collected within one year.

Amounts to be invoiced in the subsequent month for current month services are
included in billable. Billable amounts at June 30, 2003 and 2002 include
approximately $278.0 million and $236.0 million, respectively, for services
which have been rendered and will be billed in the succeeding month.

Changes in the allowance for doubtful accounts were as follows:

Year ended June 30,2003
    
    2002
    
    2001Balance at beginning of period
    
    $
    6,956
    
    
    $
    5,620
    
    
    $
    4,646Provision for uncollectible accounts receivable
    
    
    4,838
    
    
    
    3,283
    
    
    
    2,062Losses sustained, net of recoveries and other
    
    
    (4,554
    )
    
    
    (1,947
    )
    
    
    (1,088
    )Balance at end of period
    
    $
    7,240
    
    
    $
    6,956
    
    
    $
    5,620


4. Property, Equipment and Software

Property, equipment and software consists of the following (in thousands):

June 30,2003
    
    2002Land
    
    $
    21,631
    
    
    $
    21,907Buildings and improvements
    
    
    114,897
    
    
    
    98,709Computer equipment and software
    
    
    599,003
    
    
    
    434,620Furniture and fixtures
    
    
    135,861
    
    
    
    120,324Construction in progress
    
    
    1,968
    
    
    
    2,121873,360
    
    
    
    677,681Accumulated depreciation and amortization
    
    
    (395,148
    )
    
    
    (282,851
    )$
    478,212
    
    
    $
    394,830


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Goodwill and Other Intangible Assets

We adopted SFAS 142 effective July 1, 2001. The following table reflects the
effect of SFAS 142 on net income and earnings per share as if SFAS 142 had been
in effect for all periods presented (in thousands except per share amounts):

Year ended June 30,2003
    
    2002
    
    2001Net income:As reported
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Add back goodwill amortization,
net of related tax benefit ($3,757)
    
    
    
    
    
    
    
    
    
    
    20,711As adjusted
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    155,003Basic earnings per share:As reported
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35Add back goodwill amortization
(net of tax benefit)
    
    
    
    
    
    
    
    
    
    
    0.21As adjusted
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.56Diluted earnings per share:As reported
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23Add back goodwill amortization
(net of tax benefit)
    
    
    
    
    
    
    
    
    
    
    0.18As adjusted
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.41


The changes in the carrying amount of goodwill for the years ended June 30,
2003 and 2002 are as follow (in thousands):

State andLocal
    
    
    
    
    
    FederalGovernment
    
    Commercial
    
    Government
    
    TotalBalance as of June 30, 2001
    
    $
    320,112
    
    
    $
    254,775
    
    
    $
    122,873
    
    
    $
    697,760Goodwill activity during the year
    
    
    735,402
    
    
    
    399,969
    
    
    
    13,351
    
    
    
    1,148,722Balance as of June 30, 2002
    
    
    1,055,514
    
    
    
    654,744
    
    
    
    136,224
    
    
    
    1,846,482Goodwill activity during the year
    
    
    23,770
    
    
    
    35,543
    
    
    
    83
    
    
    
    59,396Balance as of June 30, 2003
    
    $
    1,079,284
    
    
    $
    690,287
    
    
    $
    136,307
    
    
    $
    1,905,878


Goodwill balances by segment as of June 30, 2002 and 2001 have been restated to
reflect a change in our internal organization that caused the composition of
our reportable segments to change. Fiscal 2003 and 2002 activity is primarily
related to acquisitions.

44



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

The following table reflects the balances of our other intangibles (in
thousands):

June 30,2003
    
    2002Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Acquired customer-related
intangibles
    
    $
    154,771
    
    
    $
    (31,735
    )
    
    $
    143,769
    
    
    $
    (14,567
    )Customer contract costs
    
    
    139,667
    
    
    
    (50,129
    )
    
    
    91,232
    
    
    
    (38,953
    )All other
    
    
    4,031
    
    
    
    (2,314
    )
    
    
    3,808
    
    
    
    (1,802
    )Total
    
    $
    298,469
    
    
    $
    (84,178
    )
    
    $
    238,809
    
    
    $
    (55,322
    )Unamortized intangible asset:Title plant
    
    $
    50,800
    
    
    
    
    
    
    $
    50,800


Aggregate amortization:For the year ended June 30, 2003
    
    $
    36,889For the year ended June 30, 2002
    
    
    22,994Estimated amortization for the years ended June 30:2004
    
    $
    37,3262005
    
    
    33,1772006
    
    
    28,2412007
    
    
    24,0752008
    
    
    21,183


Amortization includes amounts charged to amortization expense for customer
contract costs and other intangibles, other than contract inducements.
Amortization of contract inducements of $7.3 million, $0.9 million and $0 for
fiscal years 2003, 2002 and 2001, respectively, is recorded as a reduction to
related contract revenue. Amortization for fiscal years 2003, 2002 and 2001
includes approximately $16.2 million, $9.0 million, and $2.2 million related to
acquired customer-related intangibles. Customer contract costs and other
intangibles are amortized over a weighted average of approximately 8 years.

Additions to customer contract costs during fiscal year 2003 were due to our
new contracts signed in fiscal year 2003 and late fiscal year 2002.

6. Other Assets

Other assets primarily consist of long-term deposits, deferred debt issuance
costs and long-term investments accounted for using the cost method. During
fiscal years 2003 and 2002, we recorded $3.4 million ($2.1 million, net of tax)
and $8.4 million ($5.3 million, net of tax), respectively, in other
non-operating expense associated with the write-down of several long-term
investments to their estimated net realizable value. During fiscal 2001, we
recorded a $12.8 million gain in other non-operating income related to the sale
of a non-strategic minority investment in ACS Merchant Services, Inc. (see Note
13). We had approximately $5.9 million in long-term investments as of June 30,
2003.

45



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

7. Long-term Debt

A summary of long-term debt follows (in thousands):

June 30,2003
    
    20023.5% Convertible Subordinated Notes due February 2006 (3.5% Notes) (a)
    
    $
    316,990
    
    
    $
    316,990Unsecured $875 million revolving credit agreement ($875 million Credit
Facility) payable to banks, due in December 2005 (b)
    
    
    177,700
    
    
    
    Unsecured $450 million revolving credit agreement ($450 million Credit
Facility) payable to banks, due in December 2004 (c)
    
    
    
    
    
    
    15,000Interim credit facility due December 2003 (d)
    
    
    
    
    
    
    375,000Capitalized lease obligations at various interest rates,
payable through 2005
    
    
    5,414
    
    
    
    2,281Other
    
    
    
    
    
    
    292500,104
    
    
    
    709,563Less current portion
    
    
    (1,764
    )
    
    
    (1,330
    )$
    498,340
    
    
    $
    708,233


Maturities of long-term debt at June 30, 2003 are as follows:

Year ending June 30,2004
    
    $
    1,7642005
    
    
    1,5902006
    
    
    495,5682007
    
    
    7842008
    
    
    398Total
    
    $
    500,104




|(a) |  | The 3.5% Notes are convertible by the holder at any time prior to the
maturity date, unless redeemed or repurchased, into Class A common stock
at a conversion rate of 23.0234 shares of Class A common stock for each
$1,000 principal amount of 3.5% Notes (equivalent to a conversion price
of $43.44 per share of Class A common stock), subject to adjustments in
certain events. Interest on the 3.5% Notes is payable semi-annually on
February 15 and August 15 of each year commencing August 15, 2001. The
3.5% Notes may be redeemed at our option on or after February 18, 2004,
in whole or in part, at the redemption prices set forth in the 3.5%
Notes, which are 101.4% and 100.7% of the principal amount for the
twelve-month periods beginning February 18, 2004 and February 15, 2005,
respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Interest on the $875 million Credit Facility is payable monthly at
floating rates and fees based upon LIBOR and ACS credit rating. As a
result, rates will fluctuate with both changes in the overall interest
rate environment as well as changes in ACS credit rating. Currently,
borrowings bear interest at LIBOR (1.12% at June 30, 2003) plus .575%, a
facility fee of 0.175% per annum on the committed amount of the facility
and a usage fee of 0.125% per annum. The usage fee is applicable only
when borrowings exceed $437.5 million. The agreement contains covenants
which require that we comply with certain negative, affirmative and
financial covenants customary in facilities of this nature, including but
not limited to the maintenance of fixed charge ratios and minimum net
worth requirements. The agreement also has provisions which would permit
acceleration of the maturity of the borrowings after the occurrence of
certain defined events of default. As of June 30, 2003 we were in
compliance with the covenants of our $875 million Credit Facility.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | During fiscal 2000, we entered into this Credit Facility, which
increased the amount of availability from $200 million to $450 million.
Interest on the Credit Facility is payable monthly at LIBOR plus a range
of .625% to 1.125% depending on a defined debt to EBITDA ratio. The
Credit Facility contains covenants which require that we comply with
certain negative, affirmative and financial covenants customary in
facilities of this nature, including but not limited to the maintenance
of fixed charge ratios, limitations on acquisitions and minimum net worth
requirements. The agreement also has provisions which would permit
acceleration of the maturity of the borrowings after the occurrence of
certain defined events of default. This credit facility was terminated in
fiscal year 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | The interim credit facility was entered into to fund a portion of the
AFSA Data Corporation acquisition. Interest on the interim credit
facility is payable monthly at LIBOR plus a range of 0.850% to 1.875%
depending on our credit rating. The interim credit facility contains
covenants which require that we comply with certain negative, affirmative
and financial covenants customary in facilities of this nature, including
but not limited to the maintenance of fixed charge ratios, limitations on
acquisitions and minimum net worth requirements. The interim credit
facility also has provisions that would permit acceleration of the
maturity of the borrowings after the occurrence of certain defined events
of default. This credit facility was terminated in fiscal year 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash payments for interest for the years ended June 30, 2003, 2002, and 2001
were approximately $21.1 million, $27.5 million, and $19.3 million,
respectively.

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

At June 30, 2003, we have approximately $520.9 million available for use under
the $875 million revolving credit agreement after considering outstanding
letters of credit of $176.4 million. We use letters of credit to secure certain
contractual performance and other obligations.

8. Income Taxes

Income tax expense (benefit) is comprised of the following (in thousands):

Year ended June 30,2003
    
    2002
    
    2001Current:U.S. Federal
    
    $
    71,420
    
    
    $
    74,112
    
    
    $
    50,022State
    
    
    8,334
    
    
    
    8,934
    
    
    
    6,131Foreign
    
    
    3,500
    
    
    
    2,727
    
    
    
    1,689Total current expense
    
    
    83,254
    
    
    
    85,773
    
    
    
    57,842Deferred:U.S. Federal
    
    
    92,182
    
    
    
    42,150
    
    
    
    27,417State
    
    
    9,517
    
    
    
    2,937
    
    
    
    1,485Foreign
    
    
    (848
    )
    
    
    
    
    
    
    24Total deferred expense
    
    
    100,851
    
    
    
    45,087
    
    
    
    28,926Total income tax expense
    
    $
    184,105
    
    
    $
    130,860
    
    
    $
    86,768


Deferred tax assets (liabilities) consist of the following (in thousands):

June 30,2003
    
    2002Deferred tax assets:Accrued expenses not yet deductible for tax purposes
    
    $
    15,825
    
    
    $
    7,117Unearned revenue
    
    
    5,626
    
    
    
    4,481Loss carryforwards
    
    
    2,198
    
    
    
    2,428Divestiture-related accruals
    
    
    1,017
    
    
    
    4,356Other
    
    
    
    
    
    
    873Subtotal
    
    
    24,666
    
    
    
    19,255Deferred tax assets valuation allowance
    
    
    (83
    )
    
    
    (105
    )Total deferred tax assets
    
    
    24,583
    
    
    
    19,150Deferred tax liabilities:Goodwill amortization
    
    
    (120,023
    )
    
    
    (72,665
    )Depreciation and other amortization
    
    
    (64,605
    )
    
    
    (34,001
    )Unbilled revenue
    
    
    (31,832
    )
    
    
    (9,301
    )Prepaid and receivables
    
    
    (7,512
    )
    
    
    (5,921
    )Other
    
    
    (3,149
    )
    
    
    Total deferred tax liabilities
    
    
    (227,121
    )
    
    
    (121,888
    )Net deferred tax liabilities
    
    $
    (202,538
    )
    
    $
    (102,738
    )


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

At June 30, 2003, the Company had available unused domestic net operating loss
carry-forwards (NOLs), net of Internal Revenue Code Section 382 limitations,
of approximately $2.4 million which will expire over various periods through
2022. The valuation allowance at June 30, 2003 exists principally due to tax
benefits of acquired corporations for which realization of any future benefit
is uncertain due to taxable income limitations. The valuation allowance for
deferred tax assets decreased by $22 thousand and $30 thousand during the years
ended June 30, 2003 and 2002, respectively.

The depreciation and amortization related deferred tax liabilities
significantly increased during the years ended June 30, 2003 and 2002
predominantly due to current tax deductions for intangibles and goodwill, as
well as accelerated tax depreciation methods. Generally, since the adoption of
SFAS 142 eliminates the book goodwill amortization, the difference between the
cumulative book and tax bases of acquired goodwill will continue to grow as
current tax deductions are realized.

Income tax expense varies from the amount computed by applying the statutory
federal income tax rate to income before income taxes as follows (in
thousands):

Year ended June 30,2003
    
    2002
    
    2001Statutory U.S. Federal income tax
    
    $
    171,831
    
    
    $
    126,160
    
    
    $
    77,371Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    4,305State income taxes, net
    
    
    11,603
    
    
    
    7,716
    
    
    
    4,950Capital loss on sale of subsidiary
    
    
    
    
    
    
    (2,104
    )
    
    
    Other
    
    
    671
    
    
    
    (912
    )
    
    
    142Total income tax expense
    
    $
    184,105
    
    
    $
    130,860
    
    
    $
    86,768


Cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. taxes
have not been provided are included in consolidated retained earnings in the
amount of approximately $5.5 million, $8.0 million and $6.1 million as of June
30, 2003, 2002 and 2001, respectively. If such earnings were distributed, U.S.
income taxes would be partially reduced by available credits for taxes paid to
the jurisdictions in which the income was earned.

Federal, state and foreign income tax payments during the years ended June 30,
2003, 2002 and 2001 were approximately $67.7 million, $39.5 million and $80.3
million, respectively.

9. Common Stock

Our Class A common stock trades publicly on the New York Stock Exchange (symbol
ACS) and is entitled to one vote per share. Our Class B common stock is
entitled to ten votes per share. Class B shares are convertible, at the
holders option, into Class A shares, but until converted carry significant
transfer restrictions.

In March 2002, we completed the redemption of our 4% Convertible Subordinated
Notes due March 2005 (4% Notes). Holders of all of the outstanding 4% Notes
converted their Notes to shares of our Class A common stock in accordance with
Article XII of the Indenture dated as of March 20, 1998 between ACS and U.S.
Trust Company of Texas, N.A., as trustee prior to the March 15, 2002 redemption
date. As the result of such conversions, 10.8 million shares of our Class A
common stock were issued to such holders. In fiscal 2001, prior to conversion,
$63 thousand of our 4% Notes were converted into 2,952 shares of Class A common
stock.

In February 2002, we completed a two-for-one stock split of our outstanding
Class A common stock and Class B common stock implemented in the form of a 100%
stock dividend (Stock Split). Each holder of record of our Class A common
stock and Class B common stock as of the close of business on February 15, 2002
received an additional share of such stock held by them at that time. In
connection with the Stock Split, the number of shares of Class A common stock
reserved for issuance or subject to outstanding options granted under our
employee stock option or other benefit plans, as well as the number of shares
reserved for issuance under our 4% Notes and 3.5% Notes, were proportionately
increased in accordance with the terms of such options, plans and other
instruments.

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

On October 10, 2001, we completed our offering of 18.4 million shares of our
Class A common stock. The shares were issued at $40.50 per share. Net
proceeds of $714.3 million (net of underwriters fees and other costs) were
used to repay the $550 million 18-month interim credit facility incurred to
fund the IMS acquisition and a portion of the amount outstanding under our then
existing revolving credit facility.

10. Employee Benefit Plans

Under our 1997 Employee Stock Option Plan (the 1997 Plan), we have reserved
approximately 7.4 million shares of Class A common stock for issuance to key
employees at exercise prices determined by the Board of Directors. In May
2000, February 2001 and October 2001, the Board of Directors approved the
additional allotment of approximately 1.7 million, 1.6 million, and 4.1 million
shares, respectively, to the 1997 Plan in accordance with the terms and
conditions of the November 14, 1997 Proxy Statement under which the 1997 Plan
was authorized. Options granted under the 1997 Plan to our current employees
cannot exceed 12.8% of our issued and outstanding shares. Our 1988 Employee
Stock Option Plan (the 1988 Plan), which originally reserved 12 million
shares of Class A common stock for issuance, was discontinued for new grants
during fiscal 1998 and terminated (except for the exercise of then existing
option grants in September 1997) and subsequently, 3.2 million unissued shares
expired. Generally, the options under each plan vest in varying increments
over a five-year period, expire ten years from the date of grant and are issued
at exercise prices no less than 100% of the fair market value of Class A common
stock at the time of the grant. Substantially all options are exercisable 5
years after the date of grant, regardless of vesting status. As reported in
Note 1, we have elected to adopt the disclosure only provisions of SFAS 148 and
we account for stock-based employee compensation plans in accordance with APB
25. As a result, no compensation cost has been recognized in the periods
presented for stock option or employee stock purchase plans.

The Long-Term Incentive Plan approved in 1991 (the 1991 Plan) provides for
the granting of options to various employees, officers, and directors of ACS
Government Solutions. This plan was discontinued for new grants effective with
the December 1997 Government Solutions merger. All options issued under the
1991 Plan were fully vested as of the effective date of the merger. Exercise
prices of options awarded in all years were equal to the market price of the
stock on the date of the grant; therefore, no compensation costs have been
recognized for awards under this plan.

Option activity for the years ended June 30, 2003, 2002, and 2001 is summarized
as follows:

WeightedAverageOptions
    
    Option PriceOutstanding at June 30, 2000
    
    
    11,211,340
    
    
    $
    13.31Granted
    
    
    2,648,000
    
    
    
    23.85Exercised
    
    
    (2,388,016
    )
    
    
    7.46Canceled
    
    
    (759,234
    )
    
    
    18.18Outstanding at June 30, 2001
    
    
    10,712,090
    
    
    
    16.87Granted
    
    
    2,543,000
    
    
    
    39.82Exercised
    
    
    (1,679,390
    )
    
    
    10.66Canceled
    
    
    (445,200
    )
    
    
    21.11Outstanding at June 30, 2002
    
    
    11,130,500
    
    
    
    22.88Granted
    
    
    3,439,500
    
    
    
    37.45Exercised
    
    
    (1,182,800
    )
    
    
    12.04Canceled
    
    
    (427,400
    )
    
    
    32.34Outstanding as of June 30, 2003
    
    
    12,959,800
    
    
    
    27.42Vested and exercisable at June 30, 2003
    
    
    878,700
    
    
    $
    12.98Vested and unexercisable at June 30, 2003
    
    
    3,143,620
    
    
    $
    18.18


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

Further information regarding outstanding and exercisable stock options by
exercise price range as of June 30, 2003 is disclosed below:

Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$  4.00
-   $8.44
    
    
    119,800
    
    
    
    2.07
    
    
    $
    6.53
    
    
    
    119,800
    
    
    $
    6.53$10.31 - $18.38
    
    
    3,790,600
    
    
    
    5.93
    
    
    
    14.79
    
    
    
    757,700
    
    
    
    13.99$19.25 - $35.48
    
    
    3,673,000
    
    
    
    6.68
    
    
    
    24.74
    
    
    
    1,200
    
    
    
    19.50$35.75 - $50.23
    
    
    5,376,400
    
    
    
    8.85
    
    
    
    38.63
    
    
    
    
    
    
    
    12,959,800
    
    
    
    7.32
    
    
    $
    27.42
    
    
    
    878,700
    
    
    $
    12.98


Under our 1995 Employee Stock Purchase Plan (ESPP), a maximum of 4 million
shares of Class A common stock can be issued to substantially all full-time
employees. In October 2002, the Board of Directors approved an amendment to
the ESPP to increase the number of shares that can be issued under the plan
from 2 million to 4 million. Through payroll deductions, eligible participants
may purchase our stock at a 15% discount to market value. The stock is
purchased by the ESPP in the open market, and our contributions for the years
ended June 30, 2003, 2002, and 2001 which were charged to additional paid-in
capital, were approximately $3.3 million, $1.4 million, and $1.3 million,
respectively.

Under a Supplemental Executive Retirement Agreement (the Retirement
Agreement) dated December 15, 1998, we are obligated to pay our chairman
certain retirement benefits (the Retirement Benefit). The payment of the
Retirement Benefit would commence on the occurrence of several different
events, including, retirement, total and permanent disability, death,
resignation, change in control, or termination for any reason other than cause.
We have issued (and may in the future issue) certain stock options to fund the
Retirement Benefit. Based on assumptions we consider reasonable under the
circumstances, we expect that the value of the existing stock options will be
sufficient to fund the Retirement Benefit, but to the extent the value of the
options granted would be insufficient to fund the Retirement Benefit, then we
will have to fund such insufficiency. At our option, we may grant additional
stock options prior to the commencement of the payment of the Retirement
Benefit, if we estimate that the existing stock option grants are insufficient
to satisfy our obligation under this arrangement.

We have contributory retirement and savings plans, which cover all employees
and allow for discretionary matching contributions by us as determined by our
Board of Directors. Contributions made by us to certain plans during the years
ended June 30, 2003, 2002, and 2001 were approximately $24.5 million, $22.6
million and $10.5 million, respectively.

11. Earnings Per Share

Basic earnings per share of common stock is computed using the weighted average
number of our common shares outstanding during the period. Diluted earnings
per share is adjusted for the after-tax impact of interest on the 3.5% Notes
and the 4% Notes and reflects the incremental shares that would be available
for issuance upon the assumed exercise of stock options and conversion of the
3.5% Notes and the 4% Notes. All shares are presented after giving effect to
the two-for-one stock split paid on February 22, 2002 (see Note 9).

50



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

The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):

Year ended June 30,2003
    
    2002
    
    2001Numerator:Numerator for earnings per share (basic) -
income available to common stockholders
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Effect of dilutive securities:Interest on convertible debt (net of tax)
    
    
    8,218
    
    
    
    12,610
    
    
    
    9,036Numerator for earnings per share assuming dilution-
income available to common stockholders
    
    $
    315,060
    
    
    $
    242,206
    
    
    $
    143,328Denominator:Weighted average shares outstanding (basic)
    
    
    132,445
    
    
    
    118,646
    
    
    
    99,758Effect of dilutive securities:Convertible debt
    
    
    7,298
    
    
    
    14,851
    
    
    
    13,354Stock options
    
    
    3,687
    
    
    
    3,967
    
    
    
    3,344Total potential common shares
    
    
    10,985
    
    
    
    18,818
    
    
    
    16,698Denominator for earnings per share assuming dilution
    
    
    143,430
    
    
    
    137,464
    
    
    
    116,456Earnings per share (basic)
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35Earnings per share assuming dilution
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23


Options to purchase approximately 159,000 shares of common stock were
outstanding during fiscal year 2003 but were not included in the computation of
diluted earnings per share because the options exercise price was greater than
the average market price during the period. There were no antidilutive shares
in fiscal years 2002 or 2001.

12. Financial Instruments

As of June 30, 2003 and 2002, the fair values of our revolving credit balances
and other variable-rate debt instruments approximated the related carrying
values. As of June 30, 2003 and 2002, we estimated the fair value of our 3.5%
Notes at approximately $373 million and $406 million, respectively based on the
trading price on that day.

We had no derivative financial instruments as of June 30, 2003 or 2002.
However, during fiscal year 2002, we held derivative instruments in order to
manage certain risks. We held two interest rate hedges, designated as cash
flow hedges, which were initiated in December 1998. Each hedge was structured
such that we paid a fixed rate of interest of 4.54% on our $450 million then
existing revolving credit facility, and received a floating rate of interest
based on one month LIBOR. The notional amount of the two hedges totaled $100
million and expired in December 2001. We entered into a no-cost collar
agreement in June 2001 to manage the risks related to a marketable security
investment. The collar, a fair value hedge, was structured so that all
fluctuations in the price of the marketable security above or below 100% or
102.5% of its value on the date the collar was entered into were hedged. The
collar was settled and the investment sold in June 2002.

13. Related Party Transactions

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

In July 2002, our Chairman assumed in full our guaranty obligations to Citicorp
and our guaranty to Citicorp was released in full. Our minority preferred
stock interest and warrants (with a recorded value of $100,000 at June 30,
2002) in DDH were cancelled. We have no further ownership interest in DDH.
Our officers, other than the Chairman, are no longer directors of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DDH. In the first quarter of fiscal year 2003, we purchased $1.0 million in
prepaid charter flights at favorable rates from DDH. As of June 30, 2003, we
have $0.8 million remaining in prepaid flights with DDH. During fiscal year
2003, we paid DDH approximately $0.5 million for maintenance
services, chartered aircraft, and equipment.

In August 2001, we purchased a Challenger 600 aircraft from DDH for a purchase
price of $8.5 million, which included interior and exterior refurbishment of
the aircraft. As of June 30, 2002, the purchase price for the aircraft was
paid in full, and refurbishment was near completion. The aircraft was
delivered to us in the first quarter of fiscal year 2003.

In July 2000, we completed the sale of our convertible preferred stock
investment in ACS Merchant Services, Inc., a subsidiary which was sold to one
of its officers in 1996, for $15.0 million, resulting in a non-operating pretax
gain of approximately $12.8 million.

14. Commitments and Contingencies

We have various operating lease agreements for information technology equipment
and facilities. A summary of the lease commitments under noncancelable
operating leases at June 30, 2003 is as follows (in thousands):

Year ending June 30,2004
    
    $
    103,3572005
    
    
    72,8862006
    
    
    55,7882007
    
    
    39,0772008
    
    
    25,855Thereafter
    
    
    53,182$
    350,145


Lease expense for information technology equipment and facilities was
approximately $134.2 million, $117.6 million and $81.2 million for the years
ended June 30, 2003, 2002 and 2001, respectively.

Our Education Services business, which is included in our commercial segment,
performs third party student loan servicing in the Federal Family Education
Loan program (FFEL) on behalf of various financial institutions. At June 30,
2003, we serviced a FFEL portfolio of 1.3 million loans with an outstanding
principal balance of more than $14.2 billion. Some servicing agreements
contain provisions that, under certain circumstances, require us to purchase
the loans from the investor if the loan guaranty has been permanently
terminated as a result of a loan default caused by our servicing error. If
defaults caused by us are cured during an initial period, any obligation we may
have to purchase these loans expires. Loans that we purchase may be
subsequently cured; the guaranty reinstated and we repackage the loans for sale
to third parties.

We evaluate the collectibility of any purchased loans and establish a reserve
for potential losses, or default liability reserve, through a charge to the
provision for loss on defaulted loans purchased. The reserve is evaluated
periodically and adjusted based upon managements analysis of the historical
performance of the purchased loans. This reserve was approximately $4.2 million
at June 30, 2003.

Our federal government contract costs and fees are subject to audit by the
Defense Contract Audit Agency (DCAA). These audits may result in adjustments
to contract costs and fees reimbursed by our federal customers. To date, we
have experienced no material adjustments as a result of audits by the DCAA.
The DCAA has completed audits of the Companys defense contracts through fiscal
year 2001 and all other federal contracts through fiscal year 2000.

On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by 21 former employees of Gibraltar
Savings Association and/or First Texas Savings Association (collectively,
GSA/FTSA). The GSA/FTSA employees alleged that they were entitled to the
value of 803,082 shares of our stock (adjusted for February 2002 stock split)
pursuant to options issued to the GSA/FTSA employees in 1988 in connection with
a former technology outsourcing services agreement between GSA/FTSA and us.
The judgment against us was for approximately $17 million,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

which includes attorneys fees and pre-judgment interest, but excludes
additional attorneys fees of approximately $0.9 million and post-judgment
interest at the statutorily mandated rate of 10% per annum, which could be
awarded in the event the plaintiffs are successful upon appeal and final
judgment. The judgment was appealed by the plaintiffs and us.

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

On March 3, 2003, we filed a Petition for Review with the Texas Supreme Court
requesting that the Court reverse the decision of the court of appeals and
render judgment that the plaintiffs take nothing or, alternatively, remand the
case to the trial court for further proceedings. The plaintiffs did not file a
petition for review with the Texas Supreme Court. On June 19, 2003, the Texas
Supreme Court requested that the parties file briefs on the merits of the
appeal. We filed our brief on the merits on August 20, 2003, and the
plaintiffs brief on the merits is currently due by October 9, 2003.

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

One
of our subsidiaries, ACS Defense, Inc., and several other government
contractors received a grand jury document subpoena issued by the U.S. District
Court for the District of Massachusetts in October 2002. The subpoena was
issued in connection with an inquiry being conducted by the Antitrust Division
of the U.S. Department of Justice. The inquiry concerns certain IDIQ
(Indefinite Delivery  Indefinite Quantity) procurements and their related
task orders which occurred in the late 1990s at Hanscom Air Force Base in
Massachusetts. Our revenue from the contracts that we believe to be the focus
of the Justice Departments inquiry is approximately $25 million per year
representing approximately 0.6% of our annual revenue. We are conducting an
ongoing internal investigation of this matter through outside legal counsel and
we are cooperating with the Department of Justice in producing documents in
response to the subpoena and arranging for Department of Justice interviews of
employees and former employees.

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. New Accounting Standards

In May 2003, the Emerging Issues Task Force (EITF) issued EITF 01-08 Determining Whether an Arrangement Contains a Lease. EITF 01-08 provides
guidance on how to determine whether an arrangement contains a lease that is
within the scope of Statement of Financial Accounting Standards No. 13,
Accounting for Leases. The guidance in EITF 01-08 is based on whether the
arrangement conveys to the purchaser (lessee) the right to use a specific
asset. EITF 01-08 is effective for arrangements entered into or modified on or
after May 28, 2003. We do not believe that the adoption of EITF 01-08 will
have a material impact on our financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003. The
adoption of SFAS 150 had no effect on our financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, which addresses
the criteria for consolidation by business enterprises of variable interest
entities. We do not have variable interest entities and therefore, FIN 46 will
have no impact on our financial position or results of operations.

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

16. 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):

Year ended June 30,2003
    
    2002
    
    2001Net income
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292Other comprehensive income (loss):Foreign currency translation adjustment (net
of tax effect of $583)
    
    
    (971
    )
    
    
    
    
    
    
    Unrealized gain (loss) on marketable security
    
    
    
    
    
    
    (84
    )
    
    
    84Unrealized gain (loss) on hedging
instruments (net of tax effect of ($139) and
$139, respectively)
    
    
    
    
    
    
    216
    
    
    
    (216
    )Comprehensive income
    
    $
    305,871
    
    
    $
    229,728
    
    
    $
    134,160


The unrealized gain (loss) on marketable security relates to an investment in a
marketable security which was sold in June 2002. The unrealized gain (loss) on
hedging instruments relates to derivative instruments held by us due in fiscal
2002 and 2001 as described in Note 12.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. Segment Information

We are organized into commercial, state and local government, and the federal
government segments due to the different operating environments of each
segment, caused by different types of customers, differing economic
characteristics, and the nature of regulatory environments. Within the
commercial segment, we provide technology outsourcing, business process
outsourcing, and systems integration services to clients in such industries as
insurance, utilities, manufacturing, financial institutions,
telecommunications, healthcare, retail, and transportation. In the state and
local government segment, we are a business process outsourcing provider to
state and local governments. In the federal government segment, we provide
systems integration services, business process outsourcing, and technology
outsourcing to federal agencies.

In fiscal year 2001, we reported our results of operations in two segments:
commercial and federal government. The commercial segment included our state
and local government customers. In fiscal year 2002, as a result of the
acquisition of IMS and the growth in our state and local government business,
we determined that our state and local government operations met the definition
of a segment. Prior period reporting has been restated to conform to the new
segment reporting.

Over 99% of our consolidated revenues are derived from domestic clients. In
fiscal years ended 2003, 2002, and 2001, no single customer exceeded 10% of our
revenues.

The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). Intersegment sales
and transfers are priced as if the sales or transfers were to third parties.
However, these amounts during the three years presented were immaterial to the
individual segments.

We use earnings before interest, taxes and other non-operating expense
(income), or Adjusted EBITDA, to measure segment profit. Segment operating
income includes selling, general and administrative expenses directly
attributable to that segment. Corporate includes general and administrative
services shared by all of our segments such as treasury, legal, corporate
accounting, human resources, and facilities. Where practical, shared expenses
are allocated based on measurable drivers of expense (e.g., human resource
costs are allocated based on headcount).

Certain reclassifications have been made to the segment disclosures as the
result of changes to our operating structure. In fiscal year 2003, we reclassed
a certain operation previously held in our commercial segment to our state and
local government segment, due to a change in the management of that operation.
Prior years results have been restated for comparison purposes.

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

The following tables reflect the results of the segments consistent with our
management system (in thousands):

State andLocal
    
    
    
    
    
    FederalGovernment
    
    Commercial
    
    Government
    
    Corporate
    
    ConsolidatedFiscal 2003Revenues
    
    $
    1,694,178
    
    
    $
    1,242,908
    
    
    $
    850,120
    
    
    $
    
    
    
    $
    3,787,206Operating expenses
    
    
    1,353,585
    
    
    
    954,762
    
    
    
    763,440
    
    
    
    44,010
    
    
    
    3,115,797Adjusted EBITDA (b)
    
    
    340,593
    
    
    
    288,146
    
    
    
    86,680
    
    
    
    (44,010
    )
    
    
    671,409Depreciation and amortization expense
    
    
    47,700
    
    
    
    80,111
    
    
    
    21,495
    
    
    
    2,822
    
    
    
    152,128Operating income
    
    $
    292,893
    
    
    $
    208,035
    
    
    $
    65,185
    
    
    $
    (46,832
    )
    
    $
    519,281Total assets
    
    $
    1,865,072
    
    
    $
    1,338,728
    
    
    $
    376,727
    
    
    $
    118,178
    
    
    $
    3,698,705Capital expenditures
    
    $
    94,241
    
    
    $
    93,912
    
    
    $
    15,578
    
    
    $
    1,942
    
    
    $
    205,673Fiscal 2002Revenues(a)
    
    $
    1,294,250
    
    
    $
    957,333
    
    
    $
    811,335
    
    
    $
    
    
    
    $
    3,062,918Operating expenses
    
    
    1,021,067
    
    
    
    774,197
    
    
    
    727,783
    
    
    
    28,753
    
    
    
    2,551,800Adjusted EBITDA (b)
    
    
    273,183
    
    
    
    183,136
    
    
    
    83,552
    
    
    
    (28,753
    )
    
    
    511,118Depreciation and amortization expense
    
    
    33,457
    
    
    
    57,020
    
    
    
    17,894
    
    
    
    2,115
    
    
    
    110,486Operating income
    
    $
    239,726
    
    
    $
    126,116
    
    
    $
    65,658
    
    
    $
    (30,868
    )
    
    $
    400,632Total assets
    
    $
    1,660,307
    
    
    $
    1,235,841
    
    
    $
    425,732
    
    
    $
    81,687
    
    
    $
    3,403,567Capital expenditures
    
    $
    61,725
    
    
    $
    43,432
    
    
    $
    28,380
    
    
    $
    10,869
    
    
    $
    144,406Fiscal 2001Revenues(a)
    
    $
    386,436
    
    
    $
    929,457
    
    
    $
    747,666
    
    
    $
    
    
    
    $
    2,063,559Operating expenses
    
    
    291,905
    
    
    
    757,212
    
    
    
    676,728
    
    
    
    20,371
    
    
    
    1,746,216Adjusted EBITDA (b)
    
    
    94,531
    
    
    
    172,245
    
    
    
    70,938
    
    
    
    (20,371
    )
    
    
    317,343Depreciation and amortization
expense (excluding goodwill
amortization)
    
    
    10,335
    
    
    
    45,319
    
    
    
    11,795
    
    
    
    1,700
    
    
    
    69,149Goodwill amortization expense
    
    
    10,422
    
    
    
    9,328
    
    
    
    4,718
    
    
    
    
    
    
    
    24,468Operating income
    
    $
    73,774
    
    
    $
    117,598
    
    
    $
    54,425
    
    
    $
    (22,071
    )
    
    $
    223,726Total assets
    
    $
    524,340
    
    
    $
    670,666
    
    
    $
    392,389
    
    
    $
    304,292
    
    
    $
    1,891,687Capital expenditures
    
    $
    24,400
    
    
    $
    55,152
    
    
    $
    15,268
    
    
    $
    4,250
    
    
    $
    99,070




|(a) |  | Commercial revenues include $33.0 million and $37.3 million in fiscal
year 2002 and 2001, respectively related to divested units. Federal
government revenues include $4.3 million in fiscal 2002 related to
divested units.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Year ended June 30,2003
    
    2002
    
    2001Adjusted EBITDA
    
    $
    671,409
    
    
    $
    511,118
    
    
    $
    317,343Depreciation and amortization
    
    
    (152,128
    )
    
    
    (110,486
    )
    
    
    (93,617
    )Consolidated operating income
    
    
    519,281
    
    
    
    400,632
    
    
    
    223,726Interest expense
    
    
    (25,194
    )
    
    
    (30,619
    )
    
    
    (23,742
    )Other non-operating (expense) income, net
    
    
    (3,140
    )
    
    
    (9,557
    )
    
    
    21,076Income tax expense
    
    
    (184,105
    )
    
    
    (130,860
    )
    
    
    (86,768
    )Net income
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292


18. Quarterly Results of Operations (unaudited)
       (in thousands, except per share amounts)

Quarter endedFiscal 2003
    
    Fiscal 2002June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,2003
    
    2003
    
    2002
    
    2002
    
    2002
    
    2002
    
    2001
    
    2001Revenues as reported
    
    $
    1,014,178
    
    
    $
    1,005,708
    
    
    $
    929,164
    
    
    $
    897,876
    
    
    $
    856,785
    
    
    $
    800,687
    
    
    $
    750,427
    
    
    $
    655,019Revenue reclassification(a)
    
    
    
    
    
    
    (24,075
    )
    
    
    (20,350
    )
    
    
    (15,295
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Revenues as reclassified
    
    
    1,014,178
    
    
    
    981,633
    
    
    
    908,814
    
    
    
    882,581
    
    
    
    856,785
    
    
    
    800,687
    
    
    
    750,427
    
    
    
    655,019Operating income
    
    
    139,571
    
    
    
    135,089
    
    
    
    124,966
    
    
    
    119,655
    
    
    
    116,328
    
    
    
    105,341
    
    
    
    97,421
    
    
    
    81,542Net income
    
    
    83,892
    
    
    
    79,493
    
    
    
    74,001
    
    
    
    69,456
    
    
    
    68,093
    
    
    
    62,030
    
    
    
    55,560
    
    
    
    43,913Earnings per share  basic
    
    $
    .63
    
    
    $
    .60
    
    
    $
    .56
    
    
    $
    .53
    
    
    $
    .52
    
    
    $
    .51
    
    
    $
    .47
    
    
    $
    .43Weighted average shares
outstanding
    
    
    132,998
    
    
    
    132,540
    
    
    
    132,175
    
    
    
    132,073
    
    
    
    131,871
    
    
    
    122,795
    
    
    
    118,572
    
    
    
    101,580Earnings per share  diluted
    
    $
    .60
    
    
    $
    .57
    
    
    $
    .53
    
    
    $
    .50
    
    
    $
    .49
    
    
    $
    .46
    
    
    $
    .42
    
    
    $
    .39Weighted average shares
outstanding  diluted
    
    
    143,791
    
    
    
    143,657
    
    
    
    143,295
    
    
    
    142,984
    
    
    
    143,215
    
    
    
    142,776
    
    
    
    140,692
    
    
    
    123,344




|(a) |  | During the fourth quarter of fiscal year 2003, and after considering
accounting guidance and current trends in similar reporting methods by
other public companies, which indicate gross presentation of revenue for
billings of costs reimbursed under a cost reimbursable arrangement is
appropriate only when there are sufficient elements of control over the
provision of the underlying services or costs incurred, we determined that
expenses under two state and local cost reimbursable contracts should be
presented as a reduction in gross billings. We began operating these
contracts in the first quarter of fiscal year 2003. While we have certain
risks, including credit risk, under these two arrangements and we are
contractually the primary payment obligor, we concluded that we did not
have sufficient control over the underlying services. As a result, fourth
quarter 2003 results reflect $26.6 million of expenses netted against
revenue. For comparability, expenses of the prior three quarters of fiscal
2003 in the amount of $59.8 million have been reclassified in the full
year results. This reclassification has no impact on historical, current
or future operating income or earnings per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

19. Subsequent Events

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

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

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.







Item 9A. 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 June 30, 2003. Based on such
evaluation, the Companys principal executive officer and principal financial
officer have concluded that as of June 30, 2003, such disclosure controls and
procedures are effective for the purpose of ensuring that material information
required to be in this Annual Report is made known to them by others on a
timely basis. There have not been any changes in the Companys internal
control over financial reporting (as defined in Exchange Act Rule 13a-15(f) of
the Securities Exchange Act of 1934) during the quarter and year ending June
30, 2003 that have materially affected or are reasonably likely to materially
affect the Companys internal control over financial reporting.







PART III

Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10
through 14is incorporated by reference from our definitive proxy statement,
which is incorporated herein by reference.







PART IV







Item 15. Exhibits, Financial Statements and Reports on Form 8-K



| | (a) |  | Financial Statements
| | --- |  | --------------------



| |  |  | The following consolidated financial statements of Affiliated Computer
Services, Inc. and Subsidiaries are included in Part II, Item 8:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 1. |  | On April 22, 2003, the Company furnished to the SEC a Current
Report on Form 8-K (dated as of April 22, 2003) for the purpose of
furnishing the earnings press release, announcing the telephone
conference and webcast to disclose the Companys financial results
and disclosing the location of the Companys Supplementary Financial
Information used during the conference for the third quarter ended
March 31, 2003.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Exhibits
| | --- |  | --------



| |  |  | Reference is made to the Index to Exhibits beginning on page 61 for a
list of all exhibits filed as part of this report.
| |  |  | ------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this Report to be signed on our behalf by the
undersigned thereunto duly authorized representative.

Affiliated Computer Services, Inc.Date: September 17, 2003By:
    
    /s/ Warren D. EdwardsWarren D. Edwards
Executive Vice President and
Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 17th day of September 2003.

Signature
    
    Title/s/ Darwin Deason
(Darwin Deason)
    
    Director, Chairman of the Board/s/ Jeffrey A. Rich
(Jeffrey A. Rich)
    
    Director and Chief Executive Officer/s/ Mark A. King
(Mark A. King)
    
    Director, President and Chief Operating Officer/s/ Warren D. Edwards
(Warren D. Edwards)
    
    Executive Vice President and Chief Financial Officer(J. Livingston Kosberg)
    
    Director/s/ Joseph P. ONeill
(Joseph P. ONeill)
    
    Director/s/ Frank A. Rossi
(Frank A. Rossi)
    
    Director(Dennis McCuistion)
    
    Director


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INDEX TO EXHIBITS

ExhibitNumber
    
    Exhibit Name2.1
    
    
    Agreement and Plan of Merger, dated as of September 20, 1997, by
and among the Company, ACS Acquisition Corp. and Computer Data
Systems, Inc., filed as Exhibit 2.1 to the Companys Form S-4
(Registration No. 333-40351) (Form S-4) and incorporated herein
by reference.3.1
    
    
    Certificate of Incorporation of the Company, filed as Exhibit 3.1
to the Companys Registration Statement on Form S-3 dated March
30, 2001 (Registration No. 333-58038) (Form S-3) and
incorporated herein by reference.
3.2
    
    
    Certificate Of Correction to Certificate of Amendment of
Affiliated Computer Services, Inc. dated August 30, 2001.
3.3
    
    
    Bylaws of the Company, as amended and in effect on August 13, 2002.4.1
    
    
    Form of New Class A Common Stock Certificate, filed as Exhibit 4.3
to the Companys Form S-1 (Registration No. 333-79394) (Form
S-1) and incorporated herein by reference.4.2
    
    
    Rights Agreement, dated April 2, 1999, between the Company and
First City Transfer Company, as Rights Agent, filed as Exhibit 4.1
to the Companys Report on Form 8-K dated May 19, 1999 and
incorporated herein by reference.4.3
    
    
    Indenture, dated as of March 20, 1998, between Affiliated Computer
Services, Inc., as issuer and U.S. Trust Company of Texas, N.A. as
trustee, filed as Exhibit 4.1 to the Companys Report on Form 8-K
dated March 20, 1998 and incorporated herein by reference.4.4
    
    
    Registration Rights Agreement, dated as of March 17, 1998, between
Affiliated Computer Services, Inc. and Goldman, Sachs & Co., Bear,
Stearns & Co. Inc., Smith Barney Inc., Hambrecht & Quist LLC,
Donaldson, Lufkin & Jenrette Securities Corporation and Prudential
Securities Incorporated, filed as Exhibit 4.2 to the Companys
Report on Form 8-K dated March 20, 1998 and incorporated herein by
reference.4.5
    
    
    Indenture dated as of February 21, 2001, by and between the
Company, as Issuer, and U.S. Trust Company of Texas, N.A., as
Trustee, relating to the Companys 3.5% Convertible Subordinated
Notes due February 15, 2006, filed as Exhibit 4.1 to the Companys
Form S-3 and incorporated herein by reference.4.6
    
    
    Registration Rights Agreement, dated February 21, 2001, by and
between the Company and Goldman, Sachs & Co., as representative of
the several purchasers named therein relating to the Companys
3.5% Convertible Subordinated Notes due February 15, 2006, filed
as Exhibit 4.4 to the Companys Form S-3 and incorporated herein
by reference.4.7
    
    
    Specimen Note for the Companys 3.5% Convertible Subordinated
Notes due February 15, 2006, filed as Exhibit 4.2 to the Companys
Form S-3 and incorporated herein by reference.4.8
    
    
    Amendment No. 1 to First Amended and Restated Rights Agreement
dated as of February 5, 2002, by and between the Company and First
City Transfer Company, filed as Exhibit 4.1 to the Companys
Current Report on Form 8-K dated February 6, 2002 and incorporated
herein by reference.10.1
    
    
    Amended Stock Option Plan of the Company, filed as Exhibit 10.1 to
the Companys Form S-1 and incorporated herein by reference.10.2
    
    
    1997 Stock Incentive Plan of the Company, filed as Appendix to the
Companys Joint Proxy Statement / Prospectus filed as Form 14A
dated November 14, 1997 and incorporated herein by reference.


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10.3
    
    
    Reciprocal Services Agreement, dated June 30, 1994, between the
Company and Precept, filed as Exhibit 10.15 to the Companys Form
S-1 and incorporated herein by reference.10.4
    
    
    Mutual Indemnification Agreement, dated June 30, 1994, between the
Company and Precept, filed as Exhibit 10.18 to the Companys Form
S-1 and incorporated herein by reference.10.5
    
    
    Stockholders Tax Indemnification Agreement, dated June 30, 1994,
between the Company and the Stockholders named therein, filed as
Exhibit 10.19 to the Companys Form S-1 and incorporated herein by
reference.10.6
    
    
    Form of Directors Indemnification Agreement, filed as Exhibit
10.20 to the Companys Form S-1 and incorporated herein by
reference.10.7
    
    
    Credit Agreement dated December 15, 1995 the Company, Bank One,
Texas, N.A., as Documentation Agent and Co-Agent, First Interstate
Bank of Texas N.A., as Administrative Agent and Co-Agent and
Certain Lenders filed as Exhibit 10.1 to the Companys Third
Quarter Report on Form 10-Q for the quarter ended March 31, 1996
and incorporated herein by reference.10.8
    
    
    Restated Credit Agreement dated June 20, 1996 between the Company,
Borrower, Wells Fargo Bank (Texas), N.A., Agent, Bank One, Texas,
N.A., Co-Agent, and Certain Lenders for $160 million Revolving
Facility filed as Exhibit 10.19 to the Companys Annual Report on
Form 10-K for the year ended June 30, 1996 and incorporated herein
by reference.10.9
    
    
    First Amendment to Restated Credit Agreement dated July 29, 1997
the Company, Wells Fargo Bank (Texas) N.A., Agent; Bank One,
Texas, N.A., Co-Agent; and Certain Lenders for $200 million
Revolving Facility filed as Exhibit 10.14 to the Companys Annual
Report on Form 10-K for the year ended June 30, 1997 and
incorporated herein by reference.10.10
    
    
    Second Amendment to Restated Credit Agreement dated March 20, 1998
between the Company, Wells Fargo Bank (Texas) N.A., Agent; Bank
One, Texas, N.A., Co-Agent; and Certain Lenders for $200 million
Revolving Credit Facility filed as Exhibit 10.10 to the Companys
Annual Report on Form 10-K for the year ended June 30, 1999 and
incorporated herein by reference.10.11
    
    
    Third Amendment to Restated Credit Agreement dated September 24,
1999 between the Company; Wells Fargo Bank (Texas), N.A., Agent;
Bank One, Texas, N.A., Co-Agent; and certain Lenders for $200
million Revolving Credit Facility filed as Exhibit 10.11 to the
Companys Annual Report on Form 10-K for the year ended June 30,
2000 and incorporated herein by reference.10.12
    
    
    Credit Agreement dated September 27, 1999 between the Company;
Wells Fargo Bank (Texas), N.A., Agent and Arranger; and certain
Lenders for $50 million Revolving Credit Facility filed as Exhibit
10.12 to the companys Annual Report on Form 10-K for the year
ended June 30, 2000 and incorporated herein by reference.10.13
    
    
    First Amendment to Credit Agreement dated February 24, 2000
between the Company; Wells Fargo Bank (Texas), N.A., Agent and
Arranger; and certain lenders for $50 million Revolving Credit
Facility filed as Exhibit 10.13 to the Companys Annual Report on
Form 10-K for the year ended June 30, 2000 and incorporated herein
by reference.10.14
    
    
    Credit Agreement dated May 12, 2000 between the Company; Wells
Fargo Bank Texas, National Association, Administrative Agent and
Co-Lead Arranging Agent; Bank One, N.A., Syndication Agent and
Co-Lead Arranging Agent; SunTrust Bank, Documentation Agent: The
Bank of Tokyo-Mitsubishi, Ltd., Co-Agent; and certain Lenders and
certain Subsidiary Guarantors for $450 million Revolving Credit
Facility filed as Exhibit 10.14 to the Companys Annual Report on
form 10-K for the year ended June 30, 2000 and incorporated herein
by reference.


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10.15
    
    
    Form of Severance Agreement by and between the Company and Certain
Executive Officers of the Company filed as Exhibit 10.15 to the
Companys Annual Report on Form 10-K for the year ended June 30,
1997 and incorporated herein by reference.10.16
    
    
    U.S. Department of Education Contract No. PM94017001 (portions of
which are subject to an Order for Confidential Treatment pursuant
to Rule 24b-2) included as an exhibit to the Form 10-Q/A filed
August 24, 1994 by ACS Government Solutions, Inc. (formerly known
as Computer Data Systems, Inc.) and incorporated herein by
reference.10.17
    
    
    Supplemental Executive Retirement Agreement by and between the
Company and the Companys Chairman of the Board filed as Exhibit
10.13 to the Companys Annual Report on Form 10-K for the year
ended June 30, 1999 and incorporated herein by reference.10.18
    
    
    Employment Agreement by and between the Company and the Companys
Chairman of the Board filed as Exhibit 10.(iii)(A) to the
Companys Third Quarter Report on Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference.10.19
    
    
    Guaranty of Affiliated Computer Services, Inc. of Citibank loan to
DDH Aviation filed as Exhibit 10.1 to the Companys Form 10-Q for
the period ended December 31, 2000 and incorporated herein by
reference.10.20
    
    
    Stock Purchase Agreement dated as of August 18, 2001 by and among
Lockheed Martin Corporation, Lockheed Martin Investments, Inc.,
and the Company, filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated August 29, 2001 and incorporated herein
by reference.10.21
    
    
    Credit Agreement dated August 24, 2001 between the Company as
borrower, Bear Stearns Corporate Lending Inc. as Administrative
Agent and Syndication Agent, Bear, Stearns & Co., Inc. as
Bookrunner and Co-Lead Arranger, Wells Fargo Bank Texas, National
Association as Documentation Agent and Co-Lead Arranger, certain
lenders and certain subsidiary guarantors, filed as Exhibit 10.2
to the Companys Current Report on Form 8-K dated August 29, 2001
and incorporated herein by reference.10.22
    
    
    Second Amendment to the Credit Agreement and Consent dated August
10, 2001 between the Company as Borrower, Wells Fargo Bank Texas,
National Association as Administrative Agent and Co-Lead Arranging
Agent for Lenders, Bank One N.A. as Syndication Agent and Co-Lead
Arranging Agent for Lenders, SunTrust Bank as Documentation Agent
for Lenders and The Bank of Tokyo-Mitsubishi, LTD. as Co-Agent for
Lenders and subsidiary guarantors, filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K dated August 29, 2001 and
incorporated herein by reference.10.23
    
    
    Stock Purchase Agreement dated May 16, 2002 by and among Fleet
National Bank, Fleet Holding Corp. and the Company, filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K dated
June 10, 2002 and incorporated herein by reference.10.24
    
    
    Credit Agreement dated June 10, 2002 between the Company as
Borrower, Goldman Sachs Credit Partners L.P. as Co-Lead Arranger,
Sole Bookrunner and Sole Syndication Agent, Wells Fargo Bank
Texas, National Association as Co-Lead Arranger and Administrative
Agent, certain lenders and certain subsidiary guarantors, filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K dated
June 10, 2002 and incorporated herein by reference.10.25
    
    
    Revolving Credit Agreement dated as of September 12, 2002 among
the Company and other borrowers from time to time party hereto,
Wells Fargo Bank, National Association as Co-Lead Arranger and
Sole Book Runner, JP Morgan Chase Bank as Co-Lead Arranger, Wells
Fargo Bank Texas, National Association as Administrative Agent, JP
Morgan Chase Bank And Bank One, N.A. as Co-Syndication Agents and
Key


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Corporate Capital, Inc. And The Bank Of Tokyo-Mitsubishi, Ltd.
as Co-Documentation Agents, filed as Exhibit 10.25 to the
Companys Annual Report on Form 10-K for the year ended June 30,
2002, and incorporated herein by reference.
    21.1
    
    Subsidiaries of the Company
    23.1
    
    Consent of PricewaterhouseCoopers LLP
    31.1
    
    Certification of Chief Executive Officer
    31.2
    
    Certification of Chief Financial Officer
    32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 9.06 of the
Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this
Exhibit is furnished to the SEC and shall not be deemed to be
filed.
    32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 9.06 of the
Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this
Exhibit is furnished to the SEC and shall not be deemed to be
filed.




| |  |  | Filed herewith
| | - |  | --------------

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