UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2007

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

For the period from                      to                     

AFFILIATED COMPUTER SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware		51-0310342
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2828 North Haskell, Dallas, Texas		75204
(Address of principal executive offices)		(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

		Number of shares outstanding as of
Title of each class		January 31, 2008
Class A Common Stock, $.01 par value		89,374,622
Class B Common Stock, $.01 par value		6,599,372

 

 

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

INDEX

				PAGE
				NUMBER
PART I. FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements:
		Consolidated Balance Sheets (Unaudited) at December 31, 2007 and June 30, 2007			1
		Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended December 31, 2007 and 2006			2
		Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2007 and 2006			3
		Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			41
Item 4.		Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			42
Item 1A.		Risk Factors			42
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3.		Defaults Upon Senior Securities			42
Item 6.		Exhibits			42
Certification of CEO Pursuant to Rule 13a-14(a) or 15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a) or 15d-14(a)
Certification of CEO Pursuant to Rule 13a-14(b) or 15d-14(b)
Certification of CFO Pursuant to Rule 13a-14(b) or 15d-14(b)

PART I

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

		December 31,				June 30,
		2007				2007
ASSETS
Current assets:
Cash and cash equivalents		$	297,791			$	307,286
Accounts receivable, net			1,338,886				1,257,108
Income taxes receivable			16,689				13,268
Prepaid expenses and other current assets			237,561				232,872
Total current assets			1,890,927				1,810,534
Property, equipment and software, net			888,975				897,319
Goodwill			2,620,932				2,612,368
Other intangibles, net			435,250				481,378
Other assets			195,537				180,830
Total assets		$	6,031,621			$	5,982,429
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	157,812			$	97,951
Accrued compensation and benefits			185,666				246,742
Other accrued liabilities			330,550				400,238
Deferred taxes			67,430				14,418
Current portion of long-term debt			46,350				47,039
Current portion of unearned revenue			172,688				164,484
Total current liabilities			960,496				970,872
Senior Notes, net of unamortized discount			499,489				499,449
Other long-term debt			1,865,366				1,842,823
Deferred taxes			351,449				367,565
Other long-term liabilities			304,889				235,552
Total liabilities			3,981,689				3,916,261
Commitments and contingencies (See Notes 2, 5 and 15)
Stockholders’ equity:
Class A common stock, $.01 par value, 500,000 shares authorized, 110,376 and 113,960 shares issued, respectively			1,103				1,139
Class B convertible common stock, $.01 par value, 14,000 shares authorized, 6,600 shares issued and outstanding			66				66
Additional paid-in capital			1,627,614				1,642,900
Accumulated other comprehensive income, net			16,398				15,916
Retained earnings			1,460,719				1,462,115
Treasury stock at cost, 21,002 shares			(1,055,968	)			(1,055,968	)
Total stockholders’ equity			2,049,932				2,066,168
Total liabilities and stockholders’ equity		$	6,031,621			$	5,982,429

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

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues		$	1,511,442			$	1,426,761			$	3,004,525			$	2,812,199
Operating expenses:
Cost of revenues:
Wages and benefits			717,047				667,852				1,416,996				1,334,468
Services and supplies			326,457				317,618				668,223				608,980
Rent, lease and maintenance			185,203				177,099				370,121				356,155
Depreciation and amortization			94,358				85,228				185,182				166,866
Other			6,982				9,141				13,897				19,755
Total cost of revenues			1,330,047				1,256,938				2,654,419				2,486,224
Other operating expenses			23,501				19,495				46,811				34,789
Total operating expenses			1,353,548				1,276,433				2,701,230				2,521,013
Operating income			157,894				150,328				303,295				291,186
Interest expense			43,049				48,085				87,019				94,098
Other non-operating income, net			(5,509	)			(9,686	)			(6,189	)			(12,304	)
Pretax profit			120,354				111,929				222,465				209,392
Income tax expense			38,758				39,855				74,725				75,935
Net income		$	81,596			$	72,074			$	147,740			$	133,457
Earnings per share:
Basic		$	0.82			$	0.73			$	1.48			$	1.32
Diluted		$	0.81			$	0.72			$	1.47			$	1.30
Shares used in computing earnings per share:
Basic			99,505				98,914				99,613				101,183
Diluted			100,310				100,152				100,648				102,457

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

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

		Six Months Ended
		December 31,
		2007				2006
Cash flows from operating activities:
Net income		$	147,740			$	133,457
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			185,182				166,866
Stock-based compensation expense			14,316				15,592
Excess tax benefit on stock-based compensation			(2,026	)			(31	)
Deferred income tax expense			61,472				15,485
Impairment charges			1,560				1,231
Gain on investments			(367	)			(5,440	)
Gain on sale of business			(2,430	)			(2,459	)
Other non-cash activities			11,879				10,779
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable			(85,004	)			(5,496	)
Prepaid expenses and other current assets			(1,899	)			(15,143	)
Other assets			(135	)			2,433
Accounts payable			60,130				(21,399	)
Accrued compensation and benefits			(60,948	)			(17,880	)
Other accrued liabilities			(33,025	)			(2,519	)
Income taxes receivable			4,929				13,398
Other long-term liabilities			10,565				4,744
Unearned revenue			18,682				11,096
Total adjustments			182,881				171,257
Net cash provided by operating activities			330,621				304,714
Cash flows from investing activities:
Purchases of property, equipment and software, net			(132,402	)			(170,441	)
Additions to other intangible assets			(17,416	)			(14,969	)
Payments for acquisitions, net of cash acquired			(23,832	)			(102,338	)
Proceeds from divestitures, net of transaction costs			4,035				—
Purchases of investments			—				(6,406	)
Proceeds from investments			961				1,276
Other			(6,500	)			—
Net cash used in investing activities			(175,154	)			(292,878	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net			197,077				1,648,287
Payments of long-term debt			(193,229	)			(705,093	)
Purchase of treasury shares			(200,000	)			(730,689	)
Excess tax benefit on stock-based compensation			2,026				31
Proceeds from stock options exercised			29,337				5,023
Proceeds from issuance of treasury shares			—				2,923
Other			(173	)			—
Net cash (used in) provided by financing activities			(164,962	)			220,482
Net change in cash and cash equivalents			(9,495	)			232,318
Cash and cash equivalents at beginning of period			307,286				100,837
Cash and cash equivalents at end of period		$	297,791			$	333,155

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

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

1. BASIS OF PRESENTATION

Affiliated Computer Services, Inc. (the “Company”) is a Fortune 500 and S&P 500 company with approximately 62,000 employees providing business process outsourcing and information technology services to commercial and government clients. We were incorporated in Delaware on June 8, 1988, and our corporate headquarters are located in Dallas, Texas. Our clients have time-critical, transaction-intensive business and information processing needs, and we typically service these needs through long-term contracts.

The consolidated financial statements are comprised of our accounts and the accounts of our controlled subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial information presented should be read in conjunction with our consolidated financial statements for the year ended June 30, 2007. The foregoing unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of the interim period. The results for the interim period are not necessarily indicative of results to be expected for the year.

Significant accounting policies are detailed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

We present cost of revenues in our Consolidated Statements of Income based on the nature of the costs incurred. Substantially all these costs are incurred in the provision of services to our customers. The selling, general and administrative costs included in cost of revenues are not material and are not separately presented in the Consolidated Statements of Income.

2. DEASON/CERBERUS PROPOSAL

On March 20, 2007, we received a proposal from Darwin Deason, our Chairman, and Cerberus Capital Management, L.P. (“Cerberus”), on behalf of certain funds and accounts managed by it or its affiliates to acquire all of the outstanding shares of the Company for $59.25 per share in cash, other than certain shares and options held by Mr. Deason and members of our management team. On April 21, 2007, we received a revised proposal from Mr. Deason and Cerberus to acquire, for a cash purchase price of $62 per share, all of the outstanding shares of our common stock, other than certain shares and options held by Mr. Deason and members of our management team that would be rolled into equity securities of the acquiring entity in connection with the proposed transaction.  In connection with this proposal Mr. Deason entered into an Exclusivity Agreement with Cerberus.  On October 30, 2007, Cerberus withdrew its offer to acquire the Company.

During the three and six months ended December 31, 2007, we recognized approximately $3.9 million and $8 million, respectively, in legal and other costs related to this potential transaction and $(0.1 million) and $0.7 million, respectively, related to shareholder derivative lawsuits related to this potential transaction.  Through December 31, 2007, we have recognized approximately $12 million in legal and other costs related to this potential transaction and $2.7 million related to shareholder derivative lawsuits related to this potential transaction.

3. BOARD OF DIRECTORS

At a special meeting of the Board of Directors on October 30, 2007 called by the Chairman, the Chairman requested that each of our five independent directors Robert B. Holland, III, J. Livingston Kosberg, Dennis McCuistion, Joseph P. O’Neill and Frank A. Rossi immediately resign from the Board. The Chairman also presented a group of four nominees to immediately fill the vacancies caused by the requested resignations and to run for election at the Company’s next stockholders’ meeting. In a November 1, 2007 special meeting of the Board called by the Chairman, the independent directors advised the Chairman that they would not run for re-election at the next stockholders’ meeting and would resign as directors once they have had the opportunity to meet with the Chairman’s nominees and any other director candidates suggested by stockholders to determine that they are independent and capable of protecting minority stockholders. On November 1, 2007, the then current independent directors filed an action (the “Independent Director Complaint”) in the Chancery Court of Delaware (New Castles County) seeking an order declaring that they did not breach their fiduciary duties to the Company and its stockholders in connection with the process followed by the independent directors related to the proposed sale of the Company.

On November 21, 2007, we announced that the independent directors had resigned and in connection with their resignations they agreed to dismiss the Independent Director Complaint.  At the time of their resignation, we announced that Kurt Krauss, Ted Miller,

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

Richard Spears and Frank Varasano, each of whom was independent, were appointed to the Board of Directors. Mr. Spears passed away on January 5, 2008.

Also, on November 21, 2007 John H. Rexford resigned from the Company’s Board of Directors, but continued in his position as an Executive Vice President of the Company focusing on key corporate development initiatives, including mergers and acquisitions.

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The changes in the carrying amount of goodwill for the six months ended December 31, 2007 are as follows (in thousands):

		Commercial				Government				Total
Balance as of June 30, 2007		$	1,415,315			$	1,197,053			$	2,612,368
Acquisition activity			(209	)			2,620				2,411
Divestiture activity			—				(964	)			(964	)
Foreign currency translation			1,851				5,266				7,117
Balance as of December 31, 2007		$	1,416,957			$	1,203,975			$	2,620,932

Goodwill activity for the first half of fiscal year 2008 was primarily due to contingent consideration payments earned during the quarter on prior year acquisitions and the sale of our decision support business (see Note 14). Approximately $2.1 billion, or 79%, of the original gross amount of goodwill recorded is deductible for income tax purposes.

The following information relates to our other intangible assets (in thousands):

		December 31, 2007								June 30, 2007
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortizable intangible assets:
Acquired customer-related intangibles		$	419,975			$	(169,442	)		$	419,853			$	(147,872	)
Customer-related intangibles			242,055				(118,397	)			247,840				(101,217	)
All other			17,180				(11,009	)			17,248				(9,362	)
Total		$	679,210			$	(298,848	)		$	684,941			$	(258,451	)
Non-amortizable intangible assets:
Title plant		$	51,045							$	51,045
Trade name			3,843								3,843
Total		$	54,888							$	54,888

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Amortization:
Contract inducement		$	3,381			$	3,859			$	7,109			$	7,669
Acquired customer-related intangibles			10,945				10,621				21,979				20,826
All other intangibles			6,975				5,413				13,338				10,163
Total amortization		$	21,301			$	19,893			$	42,426			$	38,658

Aggregate amortization includes amounts charged to amortization expense for customer-related intangibles and other intangibles, other than contract inducements. Amortization of contract inducements is recorded as a reduction of related contract revenue. Amortizable intangible assets are amortized over the related contract term. The amortization period of customer-related intangible assets ranges from 1 to 17 years, with a weighted average of approximately 10 years. The amortization period for all other intangible assets, including trademarks, ranges from 3 to 20 years, with a weighted average of approximately 6 years.

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

Estimated amortization for the years ending June 30,
2008		$	83,607
2009			72,498
2010			60,435
2011			50,785
2012			36,700

5. DEBT

Senior Notes

On June 6, 2005, we completed a public offering of $250 million aggregate principal amount of 4.70% Senior Notes due June 1, 2010 and $250 million aggregate principal amount of 5.20% Senior Notes due June 1, 2015 (collectively, the “Senior Notes”).  Interest on the Senior Notes is payable semiannually.  The net proceeds from the offering of approximately $496 million, after deducting underwriting discounts, commissions and expenses, were used to repay a portion of the outstanding balance of our prior facility. We may redeem some or all of the Senior Notes at any time prior to maturity, which may include prepayment penalties determined according to pre-established criteria.   The Senior Notes were issued pursuant to that certain Indenture dated June 6, 2005 (which, along with any Supplemental Indentures entered into subsequent thereto and in connection therewith, is referred to as the “Indenture”) between us and The Bank of New York Trust Company, N.A. (“BONY”), as trustee, with the Wilmington Trust Company having replaced BONY as trustee on December 19, 2006 (the “Trustee”).  Please see Note 11 for a discussion of the forward interest rate hedges related to the issuance of the Senior Notes.

As the result of our failure to timely file our Annual Report on Form 10-K for the period ending June 30, 2006 by September 13, 2006, certain holders of the Senior Notes sent various notices alleging that we were in default of our covenants under the Indenture. Subsequently, those certain holders declared an acceleration of the Senior Notes, as a result of our failure to remedy the purported default set forth in their earlier notices and demanded payment of all amounts owed in respect of the Senior Notes.

It is our position that no default has occurred under the Indenture and that no acceleration has occurred with respect to the Senior Notes or otherwise under the Indenture. Further we have filed a lawsuit against the Trustee in the United States District Court, Northern District of Texas, Dallas Division, seeking a declaratory judgment affirming our position.  The Trustee filed an answer and counterclaim seeking immediate payment of all principal and accrued and unpaid interest on the Senior Notes. Alternatively, the counterclaim seeks damages measured by the difference between the fair market value of the Senior Notes on or about September 22, 2006 and par value of the Senior Notes.

Unless and until there is a final judgment rendered in the lawsuit described above (including any appellate proceedings), no legally enforceable determination can be made as to whether the failure to timely file our Annual Report on Form 10-K for the period ending June 30, 2006 is a default under the Indenture as alleged by the letters referenced above. If there is a final legally enforceable determination that the failure to timely file our Annual Report on Form 10-K for the period ending June 30, 2006 is a default under the Indenture, and that acceleration with respect to the Senior Notes was proper, the principal and premium, if any, and all accrued and unpaid interest, if any, on the Senior Notes would be immediately due and payable.

In the event the claim of default against us made by certain holders of the Senior Notes is upheld in a court of law and we are required to pay off the Senior Notes, it is most likely that we would utilize cash on hand and borrowings under our Credit Agreement with Citicorp USA, Inc., as Administrative Agent (“Citicorp”), Citigroup Global Markets Inc., as Sole Lead Arranger and Book Runner, and with Morgan Stanley Bank, SunTrust Bank, Bank of Tokyo-Mitsubishi UFJ, Ltd., Wachovia Bank National Association, Bank of America, N.A., Bear Stearns Corporate Lending and Wells Fargo Bank, N.A., as Co-Syndication Agents, and various other lenders and issuers (the “Credit Facility”) to fund such payoff.  Under the terms of the Credit Facility, we can utilize borrowings under the revolving credit facility, subject to certain liquidity requirements, or may seek additional commitments for funding under its term loan facility of the Credit Facility.  We estimate we have sufficient liquidity to meet both the needs of our operations and any potential payoff of the Senior Notes. While we do have availability under our Credit Facility to draw funds to repay the Senior Notes, there may be a decrease in our credit availability that could otherwise be used for other corporate purposes, such as acquisitions and share repurchases.

If our Senior Notes are refinanced or the determination is made that the outstanding balance is due to the noteholders, the remaining unrealized loss on forward interest rate agreements reported in other comprehensive income of $12.5 million ($7.8 million, net of

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

income tax), unamortized deferred financing costs of $2.3 million ($1.5 million, net of income tax) and unamortized discount of $0.5 million ($0.3 million, net of income tax) associated with our Senior Notes as of December 31, 2007 may be adjusted and reported as interest expense in our Consolidated Statement of Income in the period of refinancing or demand.

Credit Facility

On September 26, 2006, we received an amendment, consent and waiver from the lenders under our Credit Facility with respect to, among other provisions, waiver of any default or event of default arising under the Credit Facility as a result of our failure to comply with certain reporting covenants relating to other indebtedness, including covenants purportedly requiring the filing of reports with either the Securities and Exchange Commission (“SEC”) or the holders of such indebtedness, so long as those requirements were complied with by December 31, 2006. As consideration for this amendment, consent and waiver, we paid a fee of $2.6 million.

On December 21, 2006, we received another amendment, consent and waiver from lenders under our Credit Facility. The amendment, consent and waiver includes the following provisions, among others:

	(1)		Consent to the delivery, on or prior to February 14, 2007, of (i) the financial statements, accountant’s report and compliance certificate for the fiscal year ended June 30, 2006 and (ii) financial statements and related compliance certificates for the fiscal quarters ended June 30, 2006 and September 30, 2006, and waiver of any default arising from the failure to deliver any such financial statements, reports or certificates within the applicable time period provided for in the Credit Agreement, provided that any such failure to deliver resulted directly or indirectly from the previously announced investigation of the Company’s historical stock option grant practices (the “Options Matter”).
	(2)		Waiver of any default or event of default arising from the incorrectness of representations and warranties made or deemed to have been made with respect to certain financial statements previously delivered to the Agent as a result of any restatement, adjustment or other modification of such financial statements resulting directly or indirectly from the Options Matter.
	(3)		Waiver of any default or event of default which may arise from the Company’s or its subsidiaries’ failure to comply with reporting covenants under other indebtedness that are similar to those in the Credit Agreement (including any covenant to file any report with the SEC or to furnish such reports to the holders of such indebtedness), provided such reporting covenants are complied with on or prior to February 14, 2007.
	(4)		Amendments to provisions relating to the permitted uses of the proceeds of revolving loans under the Credit Agreement that (i) increase to $500 million from $350 million the aggregate principal amount of revolving loans that may be outstanding, the proceeds of which may be used to satisfy the obligations under the Company’s 4.70% Senior Notes due 2010 or 5.20% Senior Notes due 2015 and (ii) until June 30, 2007, decrease to $200 million from $300 million the minimum liquidity (i.e., the aggregate amount of the Company’s unrestricted cash in excess of $50 million and availability under the Credit Agreement’s revolving facility) required after giving effect to such use of proceeds.

As consideration for this amendment, waiver and consent, we paid a fee of $1.3 million. We filed our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006 on February 1, 2007 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 on January 23, 2007.

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

6. PENSION AND OTHER POST-EMPLOYMENT PLANS

Net periodic benefit cost

The following table provides the components of net periodic benefit cost (in thousands):

		Three Months Ended
		December 31,
		2007								2006
		Non-U.S.				U.S.				Non-U.S.				U.S.
		Plans				Plans				Plans				Plans
Components of net periodic benefit cost:
Defined benefit plans:
Service cost		$	1,570			$	926			$	1,510			$	834
Interest cost			1,680				123				1,426				63
Expected return on assets			(1,844	)			(173	)			(1,366	)			(54	)
Amortization of gains/losses			—				—				—				(6	)
Amortization of prior service costs			—				54				—				63
Net periodic benefit cost for defined benefit plans		$	1,406			$	930			$	1,570			$	900

		Six Months Ended
		December 31,
		2007								2006
		Non-U.S.				U.S.				Non-U.S.				U.S.
		Plans				Plans				Plans				Plans
Components of net periodic benefit cost:
Defined benefit plans:
Service cost		$	3,098			$	1,852			$	2,894			$	1,758
Interest cost			3,312				246				2,792				126
Expected return on assets			(3,644	)			(346	)			(2,708	)			(108	)
Amortization of gains/losses			—				—				—				(12	)
Amortization of prior service costs			—				108				—				126
Net periodic benefit cost for defined benefit plans		$	2,766			$	1,860			$	2,978			$	1,890

Contributions

We made contributions to the pension plans of approximately $3.8 million and $7.3 million during the three and six months ended December 31, 2007, respectively. We expect to contribute approximately $14 million during fiscal year 2008.

7. INCOME TAXES

Effective July 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for and disclosure of uncertainty in tax positions.  Additionally, FIN 48 provides guidance on the recognition, measurement, de-recognition, classification and disclosure of tax positions and on the accounting for related interest and penalties.  As a result of the implementation of FIN 48, we recognized an $11 million (net of tax benefit) increase in the reserves for uncertain tax positions, of which $8.8 million (net of tax benefit) was attributable to the accrual of interest and penalties.  These amounts were recognized as a decrease to retained earnings of $9.9 million, an increase to deferred tax assets of $1 million and an increase to income taxes receivable of $0.1 million.  Following our adoption of FIN 48, the gross balance of unrecognized tax benefits was $54.5 million at July 1, 2007, which excludes $9 million of offsetting tax benefits, primarily from international tax treaties which provide for potential relief from double taxation.  The net unrecognized tax benefits of $45.5 million as of July 1, 2007 include $41.5 million that, if recognized, would benefit our effective income tax rate. As of December 31, 2007, we had gross reserves for uncertain tax positions totaling $55.3 million, which excludes $9 million of offsetting tax benefits.

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.  Accrued interest and penalties related to unrecognized tax benefits were approximately $8.8 million (net of tax benefit) as of July 1, 2007, and $6.6 million (net of tax benefit) as of December 31, 2007, which reflects a reduction due to the application of IRS refunds to the FIN

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

48 liability.  We do not anticipate a significant change to the total amount of these unrecognized tax benefits within the next 12 months. 

We file income tax returns in various jurisdictions in which we operate, including U.S. Federal, U.S. state and numerous foreign jurisdictions.  We are currently subject to U.S. Federal income tax examinations for fiscal years 2000 and after, and are currently under examination for fiscal years 2000 through 2004.  In addition, we are subject to income tax examinations in various foreign jurisdictions for fiscal years 2001 and after.

Our effective income tax rate decreased to 32.2% and 33.6% for the three and six months ended December 31, 2007, respectively, from 35.6% and 36.3% for the three and six months ended December 31, 2006, respectively.  Our effective income tax rate decreased primarily due to an increase in other deductions and credits, as well as interest accrued on expected tax refunds in accordance with the provisions of FIN 48. 

8. EQUITY

Share repurchase programs

Fiscal Year 2008 Activity

On November 25, 2007, our Board of Directors endorsed a new $1 billion share repurchase program and authorized the purchase of up to $200 million of our Class A common stock under this program. The program, which is open ended, allows us to repurchase our shares on the open market, from time to time, in accordance with the requirements of the Securities and Exchange Commission rules and regulations, including shares that could be purchased pursuant to SEC Rule 10b5-1. The number of shares to be purchased and the timing of purchases will be based on the level of cash and debt balances, general business conditions, and other factors, including alternative investment opportunities. During the second quarter of fiscal year 2008, we repurchased approximately 4.5 million shares at an average cost of approximately $44.18 per share (approximately $200 million) all of which have been retired. The purchase of these shares was funded with cash on hand and borrowings under our Credit Facility.

Fiscal Year 2007 Activity

In June and August 2006, our Board of Directors authorized two share repurchase programs of up to $1 billion each of our Class A common stock. As of December 31, 2006, we had repurchased approximately 19.9 million shares under the June 2006 authority at an average cost of approximately $50.30 per share (approximately $1 billion) all of which have been retired, of which 14.4 million shares with an average cost of approximately $50.64 per share (approximately $730.7 million) were purchased and retired in the first six months of fiscal year 2007. The Company has not made any repurchases nor does it contemplate making any repurchases under the August 2006 share repurchase program.

In the first quarter of fiscal year 2007, we reissued approximately 57,000 treasury shares for proceeds totaling approximately $2.9 million to fund contributions to our employee stock purchase plan.

Stock option grants

During the December 9, 2006 Compensation Committee meeting, it was recognized that the grants made to Mr. Blodgett and Mr. Rexford were for a number of shares that were less than the number of shares that would have been normally granted to a new CEO and new CFO because of the limited number of options remaining available under the 1997 Stock Incentive Plan. The Compensation Committee noted that it should consider a future grant to supplement the number of options made in the earlier grant so that the aggregate number of shares granted to Mr. Blodgett and Mr. Rexford would be equal to the number that would normally be granted to a new CEO and new CFO. To accomplish this purpose, at a meeting on July 2, 2007, the Committee approved option grants (the “Grants”) to Lynn Blodgett to purchase 60,000 shares of the Company’s Class A Common Stock under the 2007 Equity Incentive Plan and to John Rexford to purchase 25,000 shares of the Company’s Class A Common Stock under the 2007 Equity Incentive Plan, subject to the waiver of the Stock Option Grant Policy by the Board of Directors, which occurred on July 9, 2007 and on which date the Grants became effective.

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

Stock option repricing
Please see Note 15 for a discussion of the repricing of certain outstanding stock options, our tender offer to amend certain options and results of the tender offer, as well as our offer to former employees.

9. EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share,” the following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Numerator:
Net income		$	81,596			$	72,074			$	147,740			$	133,457
Denominator:
Basic weighted average shares outstanding			99,505				98,914				99,613				101,183
Dilutive effect of stock options			805				1,238				1,035				1,274
Denominator for earnings per share assuming dilution			100,310				100,152				100,648				102,457
Basic earnings per share		$	0.82			$	0.73			$	1.48			$	1.32
Diluted earnings per share		$	0.81			$	0.72			$	1.47			$	1.30

Additional dilution from assumed exercises of stock options is dependent upon several factors, including the market price of our common stock. Options to purchase approximately 10,385,000 and 7,058,000 shares of common stock during the three months ended December 31, 2007 and 2006, respectively, and approximately 9,317,000 and 6,670,000 shares of common stock during the six months ended December 31, 2007 and 2006, respectively, were outstanding but were not included in the computation of diluted earnings per share because the average market price of the underlying stock did not exceed the sum of the option exercise price, unrecognized compensation expense and the windfall tax benefit.

The calculation of diluted earnings per share requires us to make certain assumptions related to the use of proceeds that would be received upon the assumed exercise of stock options. These assumed proceeds include the excess tax benefit that we receive upon assumed exercises. We calculate the assumed proceeds from excess tax benefits based on the deferred tax assets actually recorded without consideration of “as if” deferred tax assets calculated under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”).

10. COMPREHENSIVE INCOME

SFAS 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.

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

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

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Net income		$	81,596			$	72,074			$	147,740			$	133,457
Other comprehensive income (loss):
Foreign currency translation adjustment			3,814				5,597				15,556				8,312
Unrealized loss on interest rate swap agreement (net of income tax of $(4,685), $0, $(9,174) and $0, respectively)			(7,754	)			—				(15,768	)			—
Amortization of unrealized loss on forward interest rate agreements (net of income tax of $240, $240, $480 and $480, respectively)			397				397				793				793
Unrealized gain (loss) on foreign exchange forward agreements (net of income tax of $23, $229, $(91) and $446, respectively)			34				379				(167	)			738
Prepaid pension cost amortization (net of income tax of $20 and $40 respectively)			34				—				68				—
Comprehensive income		$	78,121			$	78,447			$	148,222			$	143,300

The following table represents the components of accumulated other comprehensive income (in thousands):

		As of December 31, 2007				As of June 30, 2007
Foreign currency gains		$	32,085			$	16,529
Unrealized (loss) gain on interest rate swap agreement (net of income tax of $(6,355) and $2,819, respectively)			(10,517	)			5,251
Unrealized loss on forward interest rate agreements (net of income tax of $(4,691) and $(5,170), respectively)			(7,822	)			(8,615	)
Unrealized gains on foreign exchange forward agreements (net of income tax of $135 and $226, respectively)			210				377
Unrecognized prior service costs (net of income tax of $(569) and $(609), respectively)			(1,001	)			(1,069	)
Unrealized actuarial gains on pension plans (net of income tax of $1,588 and $1,588, respectively)			3,443				3,443
Total		$	16,398			$	15,916

11. DERIVATIVES AND HEDGING INSTRUMENTS

Interest rate hedges
In March 2007, we entered into a five-year amortizing interest rate swap agreement. As of December 31, 2007 and June 30, 2007, the notional amount of the agreement totaled $700 million. The agreement is designated as a cash flow hedge of forecasted interest payments on up to $700 million outstanding floating rate debt under our Credit Facility. The interest rate swap is structured such that we pay a fixed rate of interest of 4.897%, and receive a floating rate of interest based on one month LIBOR. The unrealized loss as of December 31, 2007 of $16.9 million ($10.5 million, net of income tax) and the unrealized gain as of June 30, 2007 of $8.1 million ($5.3 million, net of income tax) was reflected in accumulated other comprehensive income. As of December 31, 2007, the fair market value of $(16.9 million) is reflected in other long-term liabilities. As of June 30, 2007, the fair market value of $8.1 million is reflected in other assets. The fair market value of the agreement reflects termination cash value.

In order to hedge the variability of future interest payments related to our Senior Notes issuance, we entered into forward interest rate agreements in April 2005. The agreements were designated as cash flow hedges of forecasted interest payments in anticipation of the issuance of the Senior Notes. The notional amount of the agreements totaled $500 million and the agreements were terminated in June 2005 upon issuance of the Senior Notes. The loss on settlement of the forward interest rate agreements of $19 million ($12 million, net of income tax) was recorded in accumulated other comprehensive income, to be amortized as an increase in reported interest expense over the term of the Senior Notes, with approximately $2.5 million to be amortized over the next 12 months. We amortized to interest expense approximately $0.6 million during both the three months ended December 31, 2007 and 2006, and approximately

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

$1.3 million during both the six months ended December 31, 2007 and 2006. The amount of gain or loss related to hedge ineffectiveness was not material.

Foreign currency forward agreements

We utilize derivative financial instruments to manage our exposure to foreign currencies related to our domestic and international operations. We enter into foreign currency forward agreements in order to hedge the exchange rate risk associated with specific forecasted transactions, including payments and receipts from customers and suppliers, and funding of payroll expenses of our offshore operations. We designate only those contracts which closely match the terms of the underlying transaction as cash flow hedges for accounting purposes. These forward contracts are assessed for effectiveness at inception and on an ongoing basis. During the three and six month periods ended December 31, 2007 and December 31, 2006, there was no deemed ineffectiveness related to cash flow hedges, and no reclassification to earnings due to hedged transactions no longer expected to occur. During the next 12 months, we expect an immaterial amount of unrealized losses related to these contracts to be reclassified to other operating income (loss), assuming market rates remain unchanged. The contracts are set to expire at various times over the next three years.

The table below provides additional information as of December 31, 2007 about our foreign currency forward contracts designated as cash flow hedges (in thousands):

																						Weighted				Cumulative
		Notional																				Average				Gain
		Amount				Contract								Counter								Contract				(Loss) in
Hedged Transaction		in USD				Currency								Currency								Rate				USD
Receipt of revenue		$	2,972			CAD					2,774			EUR					2,018				0.727			$	144
Funding of payroll			36,773			USD					36,773			MXN					410,000				11.149				153
Receipt of revenue			4,632			NOK					26,005			CHF					5,214				0.201				(39	)
Receipt of revenue			6,722			EUR					4,662			CHF					7,567				1.623				(58	)
Payment for merchandise			3,405			USD					3,405			CHF					3,993				1.173				145
Total		$	54,504																							$	345

As part of the acquisition of the Transport Revenue division of Ascom AG in December 2005, we acquired foreign exchange forward agreements that hedge our French operation’s Euro foreign exchange exposure related to its Canadian dollar and U.S. dollar revenues. These agreements do not qualify for hedge accounting under SFAS 133. In addition, we have entered into certain other foreign currency contracts not designated as hedges for accounting purposes, although management believes they are essential economic hedges. We recorded income on non-qualified hedging instruments of approximately $1 million ($0.7 million, net of income tax) and $3.1 million ($2 million, net of income tax) for the three months ended December 31, 2007 and 2006, respectively, and approximately $0.8 million ($0.6 million, net of income tax) and $2.3 million ($1.5 million, net of income tax) for the six months ended December 31, 2007 and 2006, respectively, in other non-operating income, net in our Consolidated Statements of Income. As of December 31, 2007 and June 30, 2007, the notional amount of these agreements totaled 26.1 million Euros (approximately $38.4 million) and 25.2 million Euros (approximately $33.9 million), respectively, and are set to expire at various times over the next three years. A liability was recorded for the related fair value of approximately $(3.9 million) and $(4.3 million) as of December 31, 2007 and June 30, 2007, respectively.

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

12. SEGMENT INFORMATION

During the first quarter of fiscal year 2008, we reorganized the internal operating and reporting structures in our Commercial and Government segments to more formally align our sales, service delivery and financial organizations under its appropriate leadership. As a result, we have restated our Commercial and Government segment results for prior periods to reflect our current operating and reporting structure. The restatement has no impact on our consolidated results for the period of restatement.

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

		Commercial				Government				Corporate				Consolidated
Three months ended December 31, 2007
Revenues		$	903,022			$	608,420			$	—			$	1,511,442
Operating expenses (excluding depreciation and amortization)			748,147				464,808				46,235				1,259,190
Depreciation and amortization			69,456				24,513				389				94,358
Operating income		$	85,419			$	119,099			$	(46,624	)		$	157,894
Three months ended December 31, 2006
Revenues (a)		$	849,470			$	577,291			$	—			$	1,426,761
Operating expenses (excluding depreciation and amortization)			705,768				443,329				42,108				1,191,205
Depreciation and amortization			60,877				23,994				357				85,228
Operating income		$	82,825			$	109,968			$	(42,465	)		$	150,328
Six months ended December 31, 2007
Revenues		$	1,781,901			$	1,222,624			$	—			$	3,004,525
Operating expenses (excluding depreciation and amortization)			1,478,401				945,518				92,129				2,516,048
Depreciation and amortization			135,352				49,027				803				185,182
Operating income		$	168,148			$	228,079			$	(92,932	)		$	303,295
Six months ended December 31, 2006
Revenues (a)		$	1,681,609			$	1,130,590			$	—			$	2,812,199
Operating expenses (excluding depreciation and amortization)			1,417,429				867,139				69,579				2,354,147
Depreciation and amortization			117,271				48,883				712				166,866
Operating income		$	146,909			$	214,568			$	(70,291	)		$	291,186

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

13. RESTRUCTURING ACTIVITIES

During fiscal year 2006, we began a comprehensive assessment of our operations, including our overall cost structure, competitive position, technology assets and operating platform and foreign operations. As a result, we began restructuring initiatives and activities that are expected to enhance our competitive position in certain markets, and recorded restructuring charges and asset impairments arising from our discretionary decisions. As of June 30, 2007, approximately 2,500 employees were involuntarily terminated as a result of these initiatives, consisting primarily of offshore processors and related management; however, we anticipate that a majority of these positions would be migrated to lower cost markets. The following table summarizes the activity for the accrual for involuntary termination of employees for the three months and six months ended December 31, 2007 (in thousands) exclusive of the Acquired HR Business (defined below):

Balance as of September 30, 2007		$	206
Accrual reversal			(81	)
Payments			(88	)
Balance as of December 31, 2007		$	37
Balance as of June 30, 2007		$	893
Accrual reversals			(381	)
Payments			(475	)
Balance as of December 31, 2007		$	37

The remaining accrual for involuntary termination of employees is expected to be paid in fiscal year 2008 from cash flows from operating activities.

We substantially completed the integration of the human resources consulting and outsourcing businesses acquired from Mellon Financial Corporation (the “Acquired HR Business”) in the fourth quarter of fiscal year 2006. The integration included the elimination of redundant facilities, marketing and overhead costs, and the consolidation of processes from the historical cost structure of the acquired organization. The liabilities recorded at closing for the Acquired HR Business include $22.3 million in involuntary employee termination costs for employees of the Acquired HR Business in accordance with Emerging Issues Task Force Issue No. 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination.” The following table summarizes the activity for the accrual for involuntary termination of employees for the three and six months ended December 31, 2007 (in thousands):

Balance as of September 30, 2007		$	398
Accrual reversal			(209	)
Payments			(28	)
Balance as of December 31, 2007		$	161
Balance as of June 30, 2007		$	402
Accrual reversals			(209	)
Payments			(32	)
Balance as of December 31, 2007		$	161

The remaining accrual for involuntary termination of employees is expected to be paid in fiscal year 2008 from cash flows from operating activities.

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

14. DIVESTITURES

During the second quarter of fiscal year 2008, we completed the sale of our decision support business in our Government segment and recorded a gain on the sale of approximately $2.4 million ($1.6 million, net of income tax) in other operating expense in our Consolidated Statements of Income. We believe that the decision support business is not strategic to our ongoing operations.

Revenues from the decision support business were $1.8 million and $2 million for the three months ended December 31, 2007 and 2006, respectively, and $3.7 million and $3.9 million for the six months ended December 31, 2007 and 2006, respectively. Operating income from the decision support business, excluding the gain on sale, was $0.4 million for both the three months ended December 31, 2007 and 2006, and $0.8 million and $0.7 million for the six months ended December 31, 2007 and 2006, respectively.

15. COMMITMENTS AND CONTINGENCIES

Regulatory Agency Investigations Relating to Stock Option Grant Practices

On March 3, 2006, we received notice from the SEC that it was conducting an investigation into certain stock option grants made by us from October 1998 through March 2005.  On June 7, 2006 and on June 16, 2006, we received requests from the SEC for information on all of our stock option grants since 1994.  We have been providing supplemental information to the SEC on a voluntary basis following the initial SEC requests.  We have learned that the SEC obtained a formal order of investigation in this matter in August 2006.  We are continuing to cooperate with the SEC’s investigation.

On May 17, 2006, we received a grand jury subpoena from the United States District Court, Southern District of New York, requesting production of documents related to granting of our stock option grants. We have responded to the grand jury subpoena and have provided documents to the United States Attorney’s Office in connection with the grand jury proceeding. We have informed the SEC and the United States Attorney’s Office for the Southern District of New York of the results of our internal investigation into our stock option grant practices (discussed below) and will continue to cooperate with these governmental entities and their investigations.

We initiated an internal investigation of our stock option grant practices in response to the pending informal investigation by the SEC and a subpoena from a grand jury in the Southern District of New York. The investigation reviewed our historical stock option grant practices during the period from 1994 through 2005, including all 73 stock option grants made by us during this period, and the related disclosure in our Form 10-Q for the quarter ended March 31, 2006, filed May 15, 2006 (the “May 2006 Form 10-Q”). The results of our internal investigation are fully disclosed in our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.

Subsequent to the delivery of the results of the investigation, we, with the approval of our Audit Committee, determined that the cumulative non-cash stock-based compensation expense adjustment and related income tax effects were material. Our decision to restate our financial statements was based on the facts obtained by management and a special committee comprised of all of the then independent members of the Board of Directors, which oversaw the internal investigation. We determined that the cumulative, pre-tax, non-cash stock-based compensation expense resulting from revised measurement dates was approximately $51.2 million during the period from our initial public offering in 1994 through June 30, 2006. The corrections relate to options covering approximately 19.4 million shares. Previously reported total revenues were not impacted by our restatement. The impact of the restatement on each year of our previously issued financial statements is more fully disclosed in our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.

Related income tax effects included deferred income tax benefits on the compensation expense, and additional income tax liabilities and estimated penalties and interest related to the application of Internal Revenue Code Section 162(m) and related Treasury Regulations (“Section 162(m)”) to stock-based executive compensation previously deducted, that was no longer deductible as a result of revised measurement dates of certain stock option grants. We also included in our restatements additional income tax liabilities and estimated penalties and interest, with adjustments to additional paid-in capital and income tax expense, related to certain cash and stock-based executive compensation deductions previously taken under Section 162(m), which we believed may be non-deductible as a result of information that has been obtained by us in connection with our internal investigation, due to factors unrelated to revised measurement dates. We recorded approximately $33.4 million of additional income taxes, estimated penalties and interest related to disallowed Section 162(m) executive compensation deductions resulting from revised measurement dates. At this time, we cannot predict when these Section 162(m) issues will be resolved; however, during the third quarter of fiscal year 2007, we paid approximately $35 million of estimated income taxes, penalties and interest related to Section 162(m) issues. This payment is reflected in cash flows from operating activities at June 30, 2007.  

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

In December 2006, we amended the exercise price of outstanding stock options of certain current executive officers, other executive officers and former executive officers in order to re-price all or a portion of the respective option grant to the correct accounting measurement date to avoid adverse tax consequences to individual option holders under Section 409A of the Internal Revenue Code. We paid cash payments in the aggregate amount of $2.4 million in accordance with the terms of the amendment in the third quarter of fiscal year 2008 from cash flows from operating activities. Of the $2.4 million cash payment, approximately $0.5 million was charged to wages and benefits in our Consolidated Statement of Income in the second quarter of fiscal year 2007, and the balance was charged to additional paid-in capital in our Consolidated Balance Sheet.

On June 18, 2007, we initiated a tender offer to amend certain options (the “Eligible Options”) to purchase an aggregate of 1,703,650 shares (as amended) of our Class A common stock in order to re-price all or a portion of the respective option grant to the correct accounting measurement date to avoid adverse tax consequences to individual option holders under Section 409A of the Internal Revenue Code. The Eligible Options included options that (i) were granted under our 1997 Stock Incentive Plan, as amended; (ii) had exercise prices per share that were less, or may have been less, than the fair market value per share of our common stock on the revised measurement dates for such options, as determined by us for accounting and tax purposes; (iii) were unexercised and unvested, either in whole or in part, as of January 1, 2005; (iv) were outstanding as of the expiration time of this tender offer; and (v) were held by individuals who (x) were employed by the Company through the expiration time of this tender offer (other than any executive officer or director) and (y) are subject to income taxation in the United States. Eligible participants could elect to (i) amend Eligible Options to increase the exercise price per share to the fair market value of the Company’s Class A common stock on the respective option’s measurement date and (ii) receive a cash payment equal to the difference between the new exercise price per share of each amended option and the original exercise price per share of such amended option, multiplied by the number of unexercised shares of the Company’s Class A common stock subject to such amended option.

The tender offer expired on July 17, 2007. Pursuant to the offer, we accepted for amendment options to purchase 1,696,650 shares of our Class A common stock, which represented 99.6% of the shares of our Class A common stock subject to all Eligible Options. We paid cash payments in the aggregate amount of $4.0 million in accordance with the terms of the tender offer in the third quarter of fiscal year 2008 from cash flow from operating activities. During the first quarter of fiscal year 2008, we charged approximately $1.3 million to wages and benefits in our Consolidated Statement of Income and charged the balance of the estimated cash payments to additional paid-in capital in our Consolidated Balance Sheet.

In July 2007, we notified certain former employees with vested, unexercised and outstanding options which had exercise prices per share that were less, or may have been less, than the fair market value per share of ACS on the revised measurement dates for such options, as determined by us for accounting and tax purposes, that we will pay them the additional 20% income tax imposed by Section 409A based on the excess, if any, of the fair market value of our Class A common stock (up to $62 per share) on the date a triggering event occurs or condition exists that under Section 409A results in the excess being recognized and reported as income on the former employee’s W-2 and the exercise price of the affected option (reduced by any gain that had become subject to tax in a prior year because of an earlier triggering event). As of December 31, 2007, we anticipate that these income tax reimbursements will be up to approximately $0.5 million based on the current fair market value of our Class A common stock on the exercise date and will be paid from cash flows from operating activities as the triggering event occurs for each option holder, beginning in the third quarter of fiscal year 2008. During the three and six months ended December 31, 2007, we (credited) charged approximately $(0.4 million) and $0.5 million, respectively, to wages and benefits in our Consolidated Statement of Income related to these income tax reimbursements based on the current fair market value of our Class A common stock as of December 31, 2007. The estimated liability related to these income tax reimbursements will be adjusted to reflect changes in the current fair market value of our Class A common stock each quarter until the options are exercised.

In the first quarter of fiscal year 2008, we amended the exercise price of outstanding stock options of certain current executive officers in order to re-price all or a portion of the respective option grants to the correct accounting measurement date to avoid adverse tax consequences to individual option holders under Section 409A of the Internal Revenue Code. We paid cash payments in the aggregate amount of $0.3 million in accordance with the terms of the amendment in the third quarter of fiscal year 2008 from cash flows from operating activities. Of the $0.3 million cash payment, approximately $43,000 was charged to wages and benefits in our Consolidated Statement of Income in the first quarter of fiscal year 2008, and the balance was charged to additional paid-in capital in our Consolidated Balance Sheet.

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

Lawsuits Related to Stock Option Grant Practices

Several derivative lawsuits have been filed in connection with our stock option grant practices, generally alleging claims related to breach of fiduciary duty and unjust enrichment by certain of our directors and senior executives. Those cases have been consolidated into three venues as follows:

		Dallas County Texas State District Court
•		Merl Huntsinger, Derivatively on Behalf of Nominal Defendant Affiliated Computer Services, Inc., Plaintiff, v. Darwin Deason, Mark A. King, J. Livingston Kosberg, Dennis McCuistion, Joseph P. O’Neill, Jeffrey A. Rich and Frank A. Rossi, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No. 06-03403 in the District Court of Dallas County, Texas, 193rd Judicial District filed on April 7, 2006.
•		Robert P. Oury, Derivatively on Behalf of Nominal Defendant Affiliated Computer Services, Inc., Plaintiff, v. Darwin Deason, Mark A. King, J. Livingston Kosberg, Dennis McCuistion, Joseph P. O’Neill, Jeffrey A. Rich and Frank A. Rossi, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No. 06-03872 in the District Court of Dallas County, Texas, 193rd Judicial District filed on April 21, 2006.
•		Anchorage Police & Fire Retirement System, derivatively on behalf of nominal defendant Affiliated Computer Services Inc., Plaintiff v. Jeffrey Rich; Darwin Deason; Mark King; Joseph O’Neill; Frank Rossi; Dennis McCuistion; J. Livingston Kosberg; Gerald Ford; Clifford Kendall; David Black; Henry Hortenstine; Peter Bracken; William Deckelman; and Affiliated Computer Services Inc. Cause No. 06-5265-A in the District Court of Dallas County, Texas, 14th Judicial District filed on June 2, 2006.

The Huntsinger, Oury, and Anchorage lawsuits were consolidated into one case on June 5, 2006, under the caption In Re Affiliated Computer Services, Inc. Derivative Litigation in the District Court of Dallas County, Texas, 193^rd Judicial District (the “Texas State Derivative Action”). On March 26, 2007, plaintiffs filed a Third Amended Consolidated Complaint in which the plaintiffs’ alleged certain of the defendants breached their fiduciary duties in evaluating the buyout offer from Cerberus and any other offers (see further discussion below in “Litigation arising from buy-out offer”). This case is in the discovery phase. A special trial setting is scheduled for April 29, 2008.

		Court of Chancery for the State of Delaware
•		Jan Brandin, in the Right of and for the Benefit of Affiliated Computer Services, Inc., Plaintiff, v. Darwin Deason, Jeffrey A. Rich, Mark A. King, Joseph O’Neill and Frank Rossi, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Civil Action No. 2123-VCL, pending before the Court of Chancery of the State of Delaware in and for New Castle County, filed on May 2, 2006.

On August 15, 2006, plaintiff filed a First Amended Complaint. The First Amended Complaint added Lynn R. Blodgett, David W. Black, Henry Hortenstine, Peter A. Bracken, William L. Deckelman, Jr., Warren Edwards, John M. Brophy, John Rexford, Dennis McCuistion, J. Livingston Kosberg and Clifford M. Kendall. On April 5, 2007, plaintiff Brandin filed a Motion for Summary Judgment against Darwin Deason, Jeffrey Rich and Mark King. Each of the parties has filed their respective briefs and a hearing on the Motion for Summary Judgment was held on February 5, 2008. In addition, on October 16, 2007, each of the individual defendants filed a Motion for Partial Dismissal, based on plaintiff’s lack of standing to challenge most of the stock option grants at issue. We anticipate that a hearing on the Motion for Partial Dismissal will be held in the latter part of April 2008.

		United States District Court for the Northern District of Texas
•		Alaska Electrical Fund, derivatively on behalf of Affiliated Computer Services Inc. v. Jeffrey Rich; Joseph O’Neill; Frank A. Rossi; Darwin Deason; Mark King; Lynn Blodgett; J. Livingston Kosberg; Dennis McCuistion; Warren Edwards; John Rexford and John M. Brophy, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No. 3-06CV1110-M, in the United States District Court for the Northern District of Texas, Dallas Division, filed on June 22, 2006.

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
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•

Bennett Ray Lunceford and Ann M. Lunceford, derivatively on behalf of Affiliated Computer Services Inc. v. Jeffrey Rich; Joseph O’Neill; Frank A. Rossi; Darwin Deason; Mark King; Lynn Blodgett; J. Livingston Kosberg; Dennis McCuistion; Warren Edwards; John Rexford and John M. Brophy, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No. 3-06CV1212-M, filed on July 7, 2006, in the United States District Court for the Northern District of Texas, Dallas Division.

The Alaska Electrical and Lunceford cases were consolidated into one case on August 1, 2006, under the caption In Re Affiliated Computer Services Federal Derivative Litigation, in the United States District Court for the Northern District of Texas, Master File No. 3:06-CV-1110-M (the “Texas Federal Derivative Action”). On April 5, 2007, the plaintiffs filed a Second Amended Complaint, adding causes of action related to the announced buy-out transaction as well. On June 4, 2007, ACS and the individual defendants filed a Motion to Dismiss the Second Amended Complaint, on the grounds that the buy-out claims were not yet ripe for adjudication.

On December 17, 2007, after a hearing on August 1, 2007, the judge dismissed all buy-out related causes of action, dismissed the Rule 16(b) claims against defendants Jeff Rich and Mark King, and dismissed the Rule 10(b)5 causes of action against defendants Lynn Blodgett, John Rexford, and John Brophy.  The judge also dismissed the Rule 14(a) proxy related claims, and granted plaintiffs leave to amend their complaint to state with particularity other claims not yet ruled on.

United States District Court of Texas for the Northern District of Texas

Based on the same set of facts as alleged in the above cases, two lawsuits were filed under the Employee Retirement Income Security Act (“ERISA”) alleging breach of ERISA fiduciary duties by the directors and officers as well as the ACS Benefits Administrative Committee, in connection with the retention of ACS common stock as an investment option in the ACS Savings Plan, and by causing the ACS Savings Plan to invest in ACS stock in light of the alleged stock option issues, as follows:

•		Terri Simeon, on behalf of Herself and All Others Similarly Situated, Plaintiff, vs. Affiliated Computer Services, Inc., Darwin Deason, Mark A. King, Lynn R. Blodgett, Jeffrey A. Rich, Joseph O’Neill, Frank Rossi, J. Livingston Kosberg, Dennis McCuistion, The Retirement Committee of the ACS Savings Plan, and John Does 1-30, Civil Action No. 306-CV-1592P, in the United States District Court for the Northern District of Texas, Dallas Division, filed August 31, 2006.
•		Kyle Burke, Individually and on behalf of All Others Similarly Situated, Plaintiff, vs. Affiliated Computer Services, Inc., the ACS Administrative Committee, Lora Villarreal, Kellar Nevill, Gladys Mitchell, Meg Cino, Mike Miller, John Crysler, Van Johnson, Scott Bell, Anne Meli, David Lotocki, Randall Booth, Pam Trutna, Brett Jakovac, Jeffrey A. Rich, Mark A. King, Darwin Deason, Joseph P. O’Neill and J. Livingston Kosberg, Case No. 306-CV-02379-M, United States District Court for the Northern District of Texas, Dallas Division, filed on September 15, 2006.

On February 12, 2007, the Simeon case and the Burke case were consolidated into one case, under the caption, In re Affiliated Computer Systems [sic] ERISA Litigation, Master File No. 3:06-CV-1592-M. On December 20, 2007, an Order Preliminarily Approving Settlement was entered in the In re Affiliated Computer Systems [sic] ERISA Litigation” consolidated case.  Principally, the settlement provides for a payment to the plaintiffs and the ACS Savings Plan of a total of $1.5 million, which includes attorney fees, and is subject to final approval of the court at a hearing to be held on April 28, 2008. We recorded a charge of $1.5 million ($1 million, net of income tax) in other operating expense in our Consolidated Statements of Income during the second quarter of fiscal year 2008.

All of the lawsuits related to stock option grant practices described above are being vigorously defended.  However, it is not possible at this time to reasonably estimate the possible loss or range of loss, if any, should an unfavorable outcome occur for the matters noted above.

Litigation arising from buy-out offer

Several lawsuits have been filed in connection with the announced buyout transaction, generally alleging claims related to breach of fiduciary duty, and seeking class action status. The plaintiffs in each case purport to be ACS stockholders bringing a class action on behalf of all of our public stockholders. Each plaintiff alleges that the proposal (“Proposal”) presented to us by Darwin Deason and Cerberus on March 20, 2007, to acquire our outstanding stock, is unfair to shareholders, because the consideration offered in the Proposal is alleged to be inadequate and to have resulted from an unfair process.

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In the Delaware Chancery Court, six cases were filed, as follows:

•

Momentum Partners v. Darwin Deason, Lynn R. Blodgett, Joseph P. O’Neill, Frank A. Rossi, J. Livingston Kosberg, Robert B. Holland, Dennis McCuistion, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2814-VCL, in the Court of Chancery of the State of Delaware in and for New Castle County, filed on March 20, 2007.

	•		Mark Levy v. Darwin Deason, Lynn Blodgett, John Rexford, Joseph P. O’Neill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2816-VCL, filed on March 21, 2007.
	•		St. Clair Shores Police and Fire Retirement System v. Darwin Deason, Lynn Blodgett, Joseph P. O’Neill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B. Holland, Cerberus Capital Management, L.P., Citigroup Global Markets Inc., and Affiliated Computer Services, Inc., Civil Action No. 2821-VCL, in the Court of Chancery of the State of Delaware in and for New Castle County, filed on March 22, 2007.
	•		Louisiana Municipal Police Employees’ Retirement System v. Darwin Deason, Joseph P. O’Neill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B. Holland, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2839-VCL, in the Court of Chancery of the State of Delaware in and for New Castle County, filed on March 26, 2007.
	•		Edward R. Koller v. Darwin Deason, Frank A. Rossi, J. Livingston Kosberg, Robert B. Holland, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2908-VCL, in the Court of Chancery of the State of Delaware in and for New Castle County, filed on April 20, 2007.
	•		Suzanne Sweeney Living Trust v. Darwin Deason, Lynn R. Blodgett, John H. Rexford, Joseph P. O’Neill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B. Holland, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2915-VCL, in the Court of Chancery of the State of Delaware in and for New Castle County, filed on April 24, 2007.

On May 4, 2007, each of the six Delaware buy-out cases was consolidated into one case, pending in the Delaware Chancery Court, entitled In Re Affiliated Computer Services, Inc. Shareholder Litigation, Civil Action No. 2821-VCL. On October 30, 2007, Cerberus withdrew its offer to acquire ACS. On November 2, 2007, a Consolidated Amended Class Action and Derivative Complaint was filed by the plaintiffs, adding allegations of breach of fiduciary duties related to the events surrounding the resignation of the outside directors.

In the District Court of Dallas County, Texas, two stand-alone buy-out cases were filed, as follows:

	•		Steamship Trade Association/International Longshoreman’s Association Pension Fund v Affiliated Computer Services, Inc., Darwin Deason, Lynn Blodgett, John Rexford, Joseph P. O’Neill, Gerardo I. Lopez, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B. Holland, and Cereberus [sic] Capital Management, L.P., Cause No. 07-02691 in the District Court of Dallas County, Texas, 44th Judicial District, filed on March 22, 2007.
	•		The City of Birmingham, Alabama Retirement and Relief System v. Darwin Deason, Robert B. Holland, III, J. Livingston Kosberg, Frank A. Rossi, Joseph P. O’Neill, Lynn R. Blodgett, John H. Rexford, Dennis McCuistion, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Cause No. 07-02768 in the District Court of Dallas, Texas, 160th Judicial District, filed on March 28, 2007.

In addition, in the TX State Court Consolidated stock option derivative case, on March 26, 2007, plaintiffs filed a Third Amended Consolidated Complaint, adding causes of action related to the announced buy-out transaction as well. On May 1, 2007, ACS and the individual defendants filed a Special Exceptions Motion, on the grounds that plaintiffs’ buy-out claims were not yet ripe for adjudication, i.e., no claim related to the Proposal can properly be the subject of litigation, because the Proposal has not been accepted or recommended by either the Company or by the Special Committee formed to evaluate the Proposal and strategic alternatives to the Proposal, and that plaintiffs cannot bring both direct and derivative claims in a single lawsuit. The Third Amended Petition also alleges breach of fiduciary duty premised upon an allegation that our assets and information were misappropriated by Mr. Deason and Cerberus in order to facilitate their preparation of the Proposal, and that the Proposal represents an attempt to extinguish the derivative

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(UNAUDITED)

claims related to stock option practices by eliminating the standing of the plaintiff stockholders to pursue those claims. The Third Amended Petition also suggests that the consideration offered to stockholders in the Proposal is inadequate and seeks to enjoin consummation of the Proposal.

Also, on March 29, 2007, the two stand-alone buy-out cases pending in the District Court of Dallas County, Texas were consolidated into the TX State Court Consolidated stock option derivative case.

In the Texas Federal Court Consolidated stock option derivative case, on April 5, 2007, the plaintiffs filed a Second Amended Complaint, adding causes of action related to the announced buy-out transaction as well, and adding as defendants, Clifford Kendall, David Black, Henry Hortenstine, Peter A. Bracken, William Deckelman, Jr., PricewaterhouseCoopers LLP, and Cerberus Capital Management LP. Like the Third Amended Petition in the Texas State Court Derivative Action, the Second Amended Complaint in the Texas Federal Court Derivative Action challenged both the process through which the Proposal was generated, and the substance of the Proposal. On June 4, 2007, ACS and the individual defendants filed a Motion to Dismiss the Second Amended Complaint, on the grounds that the buy-out claims were not yet ripe for adjudication, i.e., no claim related to the Proposal can properly be the subject of litigation, because the Proposal has not been accepted or recommended by either the Company or by the Special Committee formed to evaluate the Proposal and strategic alternatives to the Proposal. On December 17, 2007, the judge dismissed all buy-out related causes of action, dismissed the Rule 16(b) claims against defendants Jeff Rich and Mark King, and dismissed the Rule 10(b)5 causes of action against defendants Lynn Blodgett, John Rexford, and John Brophy.  The judge also dismissed the Rule 14(a) proxy related claims, and granted plaintiffs leave to amend their complaint to state with particularity other claims not yet ruled on.

All of the litigation arising from the buy-out offer are being vigorously defended.  However, it is not possible at this time to reasonably estimate the possible loss or range of loss, if any, should an unfavorable outcome occur for the matters noted above.

Declaratory Action with Respect to Alleged Default and Purported Acceleration of our Senior Notes and Amendment, Consent and Waiver for our Credit Facility

Please see Note 5 for a discussion of the Alleged Default and Purported Acceleration of our Senior Notes and waivers, amendments, and consents obtained for our Credit Facility.

Investigation Regarding Photo Enforcement Contract in Edmonton, Alberta, Canada

We and one of our Canadian subsidiaries, ACS Public Sector Solutions, Inc., received a summons issued February 15, 2006 by the Alberta Department of Justice, requiring us and our subsidiary to answer a charge of a violation of a Canadian federal law which prohibits giving, offering or agreeing to give or offer any reward, advantage or benefit as consideration for receiving any favor in connection with a business relationship.

On October 31, 2006, legal counsel to the Alberta government withdrew the charge against ACS. On June 27, 2007, the Alberta government also withdrew the original charge against our subsidiary, and informed the court that it would proceed against our subsidiary on the lesser charge of “aiding and abetting a breach of public trust and fraud on the government.” On November 13, 2007, the Provincial Court of Alberta, Canada dismissed all charges pending against our Canadian subsidiary, ACS Public Sector Systems, Inc.

Investigation Concerning Procurement Process at Hanscom Air Force Base

One of our subsidiaries, ACS Defense, LLC, and several other government contractors received a grand jury document subpoena issued by the U.S. District Court for the District of Massachusetts in October 2002. The subpoena was issued in connection with an inquiry being conducted by the Antitrust Division of the DOJ (defined below). 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. In February 2004, we sold the contracts associated with the Hanscom Air Force Base relationship to ManTech International Corporation (“ManTech”); however, we have agreed to indemnify ManTech with respect to this DOJ investigation. The DOJ is continuing its investigation, but we have no information as to when the DOJ will conclude this process. We have cooperated with the DOJ in producing documents in response to the subpoena, and our internal investigation and review of this matter through outside legal counsel will continue through the conclusion of the DOJ investigatory process. We are unable to express an opinion as to the likely outcome of this matter at this time. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any, should an unfavorable outcome occur for the matters noted above.

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Investigation Regarding Certain Child Support Payment Processing Contracts

Another of our subsidiaries, ACS State & Local Solutions, Inc. (“ACS SLS”), 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 DOJ. In January 2008 we were advised by the Antitrust Division of the U.S. Department of Justice (“DOJ”) that the DOJ had closed its grand jury investigation in the Southern District of New York regarding possible violations of the Sherman Act and other statutes in connection with child support payment processing contract performed by our wholly owned subsidiary, ACS State & Local Solutions, Inc.

Investigation regarding Florida Workforce Contracts

On January 30, 2004, the Florida Agency for Workforce Innovation’s (“AWI”) Office of Inspector General (“OIG”) issued a report that reviewed 13 Florida workforce regions, including Dade and Monroe counties, and noted concerns related to the accuracy of customer case records maintained by our local staff.  We had no revenue related to this contract in fiscal years 2008 and 2007.  In March 2004, we filed our response to the OIG report. The principal workforce policy organization for the State of Florida, which oversees and monitors the administration of the State’s workforce policy and the programs carried out by AWI and the regional workforce boards, is Workforce Florida, Inc. (“WFI”).  On May 20, 2004, the Board of Directors of WFI held a public meeting at which the Board announced that WFI did not see a systemic problem with our performance of these workforce services and that it considered the issue closed. There were also certain contract billing issues that arose during the course of our performance of our workforce contract in Dade County, Florida, which ended in June 2003. However, during the first quarter of fiscal year 2005, we settled all financial issues with Dade County with respect to our workforce contract with that county and the settlement was fully reflected in our results of operations for the first quarter of fiscal year 2005. We were also advised in February 2004 that the SEC had initiated an informal investigation into the matters covered by the OIG’s report, although we have not received any request for information or documents since the middle of calendar year 2004. On March 22, 2004, ACS SLS received a grand jury document subpoena issued by the U.S. District Court for the Southern District of Florida.  The subpoena was issued in connection with an inquiry being conducted by the DOJ and the Inspector General’s Office of the U.S. Department of Labor (“DOL”) into the subsidiary’s workforce contracts in Dade and Monroe counties in Florida, which also expired in June 2003, and which were included in the OIG’s report. On August 11, 2005, the South Florida Workforce Board notified us that all deficiencies in our Dade County workforce contract have been appropriately addressed and all findings are considered resolved. On August 25, 2004, ACS SLS received a grand jury document subpoena issued by the U.S. District Court for the Middle District of Florida in connection with an inquiry being conducted by the DOJ and the Inspector General’s Office of the DOL.  The subpoena related to a workforce contract in Pinellas County, Florida, for the period from January 1999 to the contract’s expiration in March 2001, which was prior to our acquisition of this business from Lockheed Martin Corporation in August 2001. Further, we settled a civil lawsuit with Pinellas County in December 2003, with respect to claims related to the services rendered to Pinellas County by Lockheed Martin Corporation prior to our acquisition of ACS SLS (those claims having been transferred with ACS SLS as part of the acquisition), and the settlement resulted in Pinellas County paying ACS SLS an additional $600,000. We are continuing to cooperate with the DOJ and DOL in connection with their investigations. At this stage of these investigations, we are unable to express an opinion as to their likely outcome. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any. During the second quarter of fiscal year 2006, we completed the divestiture of substantially all of our welfare-to-workforce business. However, we retained the liabilities for this business which arose from activities prior to the date of closing, including the contingent liabilities discussed above.

On January 3, 2003, a Complaint was filed under seal in the United States District Court, Middle District of Florida, Tampa Division, by a former Pinellas County Administrator under the “Qui Tam” provisions of the False Claims Act.  On October 23, 2006, the United States filed a notice with the court that it would not intervene in the Complaint.  The court then entered an order to unseal the Complaint and, we were subsequently served with the Complaint.  The allegations in this Complaint arise from the workforce contract in Pinellas County, Florida, that is the subject of the grand jury document subpoena issued by the U.S. District Court for the Middle District of Florida in connection with an inquiry being conducted by the DOJ and the Inspector General’s Office of the DOL (as discussed above).    We intend to vigorously defend this case.  However, it is not possible at this time to reasonably estimate the possible loss or range of loss, if any, should an unfavorable outcome occur for the matters noted above.

Other

Certain contracts, primarily in our Government segment, require us to provide a surety bond or a letter of credit as a guarantee of performance. As of December 31, 2007, $512.5 million of our outstanding surety bonds and $100.7 million of our outstanding letters of credit secure our performance of contractual obligations with our clients. Approximately $20.9 million of our letters of credit secure our casualty insurance and vendor programs and other corporate obligations. In general, we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract; the probability of which we

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
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believe is remote. We believe that we have sufficient capacity in the surety markets and liquidity from our cash flow and our Credit Facility to respond to future requests for proposals.

We have approximately $17.3 million of U.S. Treasury Notes in conjunction with a contract in our Government segment pledged in accordance with the terms of the contract to secure our performance. The U.S. Treasury Notes are accounted for as held to maturity pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and reflected in other assets in our Consolidated Balance Sheets.

We are obligated to make certain contingent payments to former shareholders of acquired entities upon satisfaction of certain contractual criteria in conjunction with certain acquisitions. During the first six months of fiscal year 2008, we made contingent consideration payments of $23.7 million related to acquisitions completed in prior years, of which $20.9 million was accrued at June 30, 2007. As of December 31, 2007, the maximum aggregate amount of the outstanding contingent obligations to former shareholders of acquired entities is approximately $62.4 million. Any such payments primarily result in a corresponding increase in goodwill.

As discussed in Note 7, we adopted the provisions of FIN 48 as of July 1, 2007. As of December 31, 2007, we had gross reserves for uncertain tax positions totaling $55.3 million which excludes $9 million of offsetting tax benefits. We are unable to make a reasonably reliable estimate as to when a cash settlement with a taxing authority will occur.

We indemnified Lockheed Martin Corporation against certain specified claims from certain pre-sale litigation, investigations, government audits and other issues related to the sale of the majority of our federal business to Lockheed Martin Corporation in fiscal year 2004. Our contractual maximum exposure under these indemnifications was $85 million. During the second quarter of fiscal year 2008, we settled all issues and claims with Lockheed Martin Corporation related to this divestiture and our acquisition of Lockheed Martin Corporation’s commercial information technology services business in fiscal year 2004. This settlement resulted in a payment to Lockheed Martin Corporation of $6.5 million in the second quarter of fiscal year 2008, reflected in cash flows from investing activities in our Consolidated Statement of Cash Flows, and $2.2 million ($1.5 million, net of income tax) of income recorded to other operating expense in our Consolidated Statement of Income during the second quarter of fiscal year 2008.

Our Education Services business, which is included in our Commercial segment, performs third party student loan servicing in the Federal Family Education Loan program (“FFEL”) on behalf of various financial institutions. We service these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by us to a third party. At December 31, 2007, we serviced a FFEL portfolio of approximately 2.4 million loans with an outstanding principal balance of approximately $34.6 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 the loans repackaged for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans and establish a reserve for potential losses, or default liability reserve, through a charge to the provision for loss on defaulted loans purchased. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of December 31, 2007, other accrued liabilities include reserves which we believe to be adequate.

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

16. NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FIN 48, which clarifies the accounting for and disclosure of uncertainty in tax positions. Additionally, FIN 48 provides guidance on the recognition, measurement, de-recognition, classification and disclosure of tax positions and on the accounting for related interest and penalties.  We adopted FIN 48 effective July 1, 2007. Please see Note 7 for a discussion of the adoption of FIN 48 and the impact on our financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements.  The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The statement emphasizes that fair value is

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a market-based measurement and not an entity-specific measurement.  It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact, if any, that SFAS 157 will have on our financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, (“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date.   SFAS 159 provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 is effective as of the beginning of an entity’s fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.”  We have not yet determined the impact, if any, that SFAS 159 will have on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations” (“SFAS 141R”), which establishes principles and requirements for how an acquirer accounts for business combinations. SFAS 141R includes guidance for recognizing and measuring the assets acquired, liabilities assumed, and any noncontrolling or minority interests in an acquisition. SFAS 141R applies prospectively and will become effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact, if any, that SFAS 141R will have on our financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a separate component of equity, and net income attributable to the parent and to the non-controlling interest to be separately identified in the income statement. SFAS 160 also requires changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 applies prospectively and is effective for the Company beginning July 1, 2009. Certain presentation requirements of SFAS 160 are effective retrospectively. We are currently evaluating the impact, if any, that SFAS 160 will have on our financial statements.

17. SUBSEQUENT EVENTS

In January 2008, we acquired Syan Holdings Limited (“Syan”), a United Kingdom (“UK”)-based provider of information technology outsourcing services, for approximately $60 million (30.5 million pounds Sterling). The transaction will be funded entirely with existing cash on hand. We believe the acquisition strengthens our global ITO presence by adding a base of UK operations, including two data centers, and expanding our global reach.

We entered into a zero cost interest rate collar on January 28, 2008. The collar is designated as a cash flow hedge of forecasted interest payments associated with our floating rate debt, and contains an interest rate cap of 3.281% and a floor of 2.425%. The notional amount of the collar is $500 million, which combined with our $700 million interest rate swap, hedges $1.2 billion of our floating rate debt. The interest rate collar was executed in two transactions each having two year terms, $300 million of which expires on January 30, 2010 and $200 million of which expires on February 11, 2010. The transaction had a fair market value of zero at inception.

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

All statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995).  Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements.  Such risks and uncertainties include, but are not limited to:

	•		We have issued debt and have a substantial uncommitted facility available to us. Our debt service cost could limit cash flow available to fund our operations, and may limit our ability to obtain further debt or equity financing;
	•		Alleged defaults and purported acceleration of our Senior Notes, if upheld in litigation, could have a negative impact on our cash flow and divert resources that could otherwise be utilized in our business operations;
	•		The complexity of regulatory environments in which we operate has increased and may continue to increase our costs;
	•		We are subject to the oversight of the Securities and Exchange Commission (“SEC”) and other regulatory agencies and investigations by those agencies could divert management’s focus and could have a material adverse impact on our reputation and financial condition;
	•		Reductions of our credit rating may have an adverse impact on our business;
	•		A decline in revenues from or a loss of significant clients could reduce our profitability and cash flow;
	•		Our ability to recover capital investments in connection with our contracts is subject to risk;
	•		We have non-recurring revenue, which subjects us to a risk that our revenues from year to year may fluctuate;
	•		The markets in which we operate are highly competitive and we may not be able to compete effectively;
	•		We may not be able to make acquisitions that will complement our growth;
	•		A failure to properly manage our operations and our growth could have a material adverse effect on our business;
	•		Our Government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts;
	•		We may incur delays in signing and commencing new business as the result of protests of Government contracts that we are awarded;
	•		The exercise of contract termination provisions and service level penalties may have an adverse impact on our business;
	•		Some of our contracts contain pricing provisions that could adversely affect our operating results and cash flow;
	•		Claims associated with our actuarial consulting and benefit plan management services could negatively impact our business;
	•		The loss of or change in our significant software vendor relationships could have a material adverse effect on our business;
	•		We may be subject to claims of infringement of third-party intellectual property rights which could adversely affect our business;
	•		We are subject to United States and foreign jurisdiction laws relating to individually identifiable information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations;
	•		We are subject to breaches of our security systems;
	•		Budget deficits and/or fluctuations in the number of requests for proposals issued by state and local governments and their agencies may adversely impact our business;
	•		Our international operations are subject to a number of risks;
	•		Armed hostilities and terrorist attacks may negatively impact the countries in which we operate;
	•		A failure to attract and retain necessary technical personnel, skilled management and qualified subcontractors may have an adverse impact on our business;
	•		Risks associated with loans that we service may reduce our profitability and cash flow;
	•		A disruption in utility or network services may have a negative impact on our business; and
	•		Our indemnification obligations may have a material adverse effect on our business.

For more details on factors that may cause actual results to differ materially from such forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, and other reports from time to time filed with or furnished to the SEC. We disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However,

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

OVERVIEW

We identified a number of risk factors in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Management continually monitors the general economic conditions, changes in technology and other developments in the markets we serve, competitive pricing trends and contractual terms for future impact on the Company in order to respond effectively and on a timely basis to these developments.

The demand for our services has grown in recent years, and we believe that this demand will continue to grow as the overall trend toward outsourcing for both the Commercial and Government segments continues to grow. We provide non-core, mission critical services to our clients. These are services that clients need to run their day-to-day business. The marketplace continues to accept outsourcing as a means to provide these services at a lower cost. However, should this trend toward outsourcing weaken, it may materially affect our results of operations and financial position.

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. We derive our revenues from delivering comprehensive business process outsourcing and information technology services solutions to commercial and government clients.  A substantial portion of our revenues is derived from recurring monthly charges to our clients under service contracts with initial terms that vary from one to ten years. The recurring nature of our revenue gives us predictability regardless of the economic cycle. We define recurring revenues as revenues derived from services that our clients use each year in connection with their ongoing businesses, and accordingly, exclude software license fees, short-term contract programming and consulting engagements, product installation fees, and hardware and software sales. However, as we add, through acquisitions or new service offerings, consulting or other services to enhance the value delivered and offered to our clients, which are primarily short-term in nature, we may experience variations in our mix of recurring versus non-recurring revenues.

We seek to expand existing client relationships by increasing the scope and breadth of services we provide. In order to expand these existing relationships, we must focus on the performance of our contractual obligations and continually monitor client satisfaction. Renewal rates are a key indicator of client satisfaction. We calculate our renewal rate based on the total annual recurring revenue of renewals won as a percentage of total annual recurring revenue of all renewals sought. For the first six months of fiscal year 2008, we renewed approximately 88% of total renewals sought, totaling $239.4 million of annual recurring revenue with a total contract value of approximately $1.2 billion. During the second quarter of fiscal year 2008, we renewed approximately 84% of total renewals sought totaling approximately $149.2 million of annual recurring revenue with a total contract value of approximately $1 billion. Average contract life for renewals varies between our government and commercial segments; the average contract life of renewals in the government segment is often longer than those in the commercial segment. While we track renewal rates on a quarterly basis, we believe it is appropriate to analyze our renewal rates on an annual basis due to the timing of renewal opportunities.

Our long-term contracts generally have service level agreements for which there may be penalties if certain service levels are not met, and also include various termination provisions, some of which may be unrelated to our performance under the contract, such as termination for convenience in certain Government contracts or termination due to a reduction in our credit rating. While there is the possibility that clients may impose penalties or terminate our services, management believes that if we meet our contractual obligations and maintain client satisfaction, we can reasonably mitigate risks that may have a material adverse affect on our results of operations and financial condition.

In addition, we have a broad client base. Our largest customer represented approximately 4% of fiscal year 2007 revenues, and our largest 5 clients represented approximately 13% of fiscal year 2007 revenues. 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.

Management focuses on various metrics in analyzing our business and its performance and outlook. One such metric is our sales pipeline, which was approximately $1.9 billion of annual recurring revenues as of December 31, 2007.  Our sales pipeline is a qualified pipeline of deals with signings anticipated within the next six months and excludes deals with annual recurring revenue over $100 million. Both the Commercial and Government pipelines have significant, quality opportunities across multiple lines of business and in multiple vertical markets. As of December 31, 2007, the Commercial segment comprised approximately 65% of our pipeline and the Government segment comprised the remaining 35%. By service line, approximately 75% of our pipeline is business process

outsourcing and approximately 25% of the pipeline is information technology solutions as of December 31, 2007. The Commercial segment pipeline includes opportunities in information technology services, commercial healthcare with both information technology and business process outsourcing opportunities, transactional business process outsourcing and human resources outsourcing. The Government segment pipeline includes opportunities in our domestic and international transportation business, government healthcare and federal government services.

While the magnitude of our sales pipeline is an important indicator of potential new business signings and potential future internal revenue growth, actual new business signings and internal revenue growth depend on a number of factors including the effectiveness of our sales pursuit teams, competition for a deal, deal pricing, cash flow generation qualities of each deal and other risks described further in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

We use internal revenue growth as a measure of the organic growth of our business. Internal revenue growth is measured as total revenue growth less acquired revenue from acquisitions and revenues from divested operations.  At the date of acquisition, we identify the trailing twelve months of revenue of the acquired company as the “pre-acquisition revenue of acquired companies.”  Pre-acquisition revenue of the acquired companies is considered “acquired revenues” in our calculation, and revenues from the acquired company, either above or below that amount are components of “internal growth” in our calculation.  We use the calculation of internal revenue growth to measure revenue growth excluding the impact of acquired revenues and the revenue associated with divested operations and we believe these adjustments to historical reported results are necessary to accurately reflect our internal revenue growth.  Revenues from divested operations are excluded from the internal revenue growth calculation in the periods following the effective date of the divestiture.  Prior period internal revenue growth calculations are not restated for current period divestitures. Our measure of internal revenue growth may not be comparable to similarly titled measures of other companies.

Management analyzes new business signings on a trailing twelve month basis as it is generally a better indicator of future growth than quarterly new business signings which can vary due to timing of contract execution. We define new business signings as annual recurring revenue from new contracts and the incremental portion of renewals that are signed during the period, which represents the estimated first twelve months of revenue to be recorded under the contracts after full implementation. We use new business signings as additional measures of estimating total revenue represented by contractual commitments, both to forecast prospective revenues and to estimate capital commitments.  Revenues for new business signings are measured under GAAP. There are no third party standards or requirements governing the calculation of new business signings and our measure may not be comparable to similarly titled measures of other companies. We define total contract value as the estimated total revenues from contracts signed during the period which represents estimated total revenue over the term of the contract.  We use total contract value as an additional measure of estimating total revenue represented by contractual commitments, both to forecast prospective revenues and to estimate capital commitments.  Revenues for annual recurring revenue and total contract value are measured under GAAP.

During the second quarter of fiscal year 2008, we signed contracts with new clients and incremental business with existing clients representing $205.3 million of annualized recurring revenue with an estimated $750 million in total contract value. The Commercial segment contributed 74% of the new contract signings (based on annual recurring revenues) including growth with Sprint Nextel Corporation, Aetna Inc. and Michelin. The Government segment contributed 26% of the new contract signings (based on annual recurring revenues) including contracts with the Texas Health and Human Services Commission and the Centers for Medicare & Medicaid Services.

We compete for new business in the competitive information technology services and business process outsourcing markets. The overall health of these markets and the competitive environment can be determined by analyzing several key metrics. One such metric is the overall expected operating margin of our new business signings which is a good indicator of our expected future operating margin given the long-term nature of our customer contracts. We believe the expected operating margin of new business signings is consistent with our historical operating margin. We focus on the expected operating margins of the new business we are signing to ensure the operating margins we expect to generate are commensurate with the capital intensity of the new business opportunity, the risk profile of the services we are providing and the overall return on capital.

Management responds 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. Management continually assesses the capital intensity of these technological advances and client requirements, addressing the challenge to stay ahead of the competition for innovative solutions and provide a lower cost solution for clients.

We monitor the capital intensity, defined as the total of capital expenditures and additions to intangible assets as a percentage of revenue, of new business signings. Understanding the capital intensity of new business signings is helpful in determining the future free cash flow generating levels of our business. Historically, the capital intensity in our business has ranged between 5% and 7% of revenue. During the second quarter of fiscal year 2008, the overall capital intensity of our business was approximately 5% of revenue. During fiscal year 2007, the overall capital intensity of our business was approximately 6% of revenue. We believe the expected

capital intensity range of our new business signings reflects a healthy competitive environment and the related risks we are taking with respect to our new business process outsourcing business and information technology services business.

Retaining and training our employees is a key component to our historical success and will continue to be a major factor in our future success.  Because we operate in intensely competitive markets, our success depends to a significant extent on our ability to attract, retain and motivate highly skilled and qualified personnel. We consistently review our employee retention rates on a regional and global basis to ensure that we are competitive in hiring, retaining and motivating our employees. We perform benchmarking studies against some markets in which we compete to ensure our competitiveness in compensation and benefits and utilize employee surveys to gauge our employees’ level of satisfaction. We provide our employees ongoing technological, management, financial and leadership training and will continue to do so to develop our employees and remain competitive. We utilize activity based compensation as a means to motivate certain of our employees in both segments of our business and anticipate increasing our use of activity based compensation in fiscal year 2008. We believe our use of activity based compensation is a competitive advantage for ACS.

SIGNIFICANT DEVELOPMENTS

Deason/Cerberus Proposal
Please see Note 2 to our Consolidated Financial Statements for a discussion of the Deason/Cerberus proposal to purchase the Company.

Board of Directors
Please see Note 3 to our Consolidated Financial Statements for a discussion of the change in our Board of Directors during the second quarter of fiscal year 2008.

Divestiture
Please see Note 14 to our Consolidated Financial Statements for a discussion of the divestiture of our decision support business during the second quarter of fiscal year 2008.

Adoption of FIN 48
Effective July 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for and disclosure of uncertainty in tax positions. Please see Note 7 to our Consolidated Financial Statements for a discussion of our adoption of FIN 48.

Stock option repricing
Please see Note 15 to our Consolidated Financial Statements for a discussion of the repricing of certain outstanding stock options, our tender offer to amend certain options and results of the tender offer, as well as our offer to former employees.

Subsequent events
In January 2008, we acquired Syan Holdings Limited (“Syan”), a United Kingdom (“UK”)-based provider of information technology outsourcing services, for approximately $60 million (30.5 million pounds Sterling). The transaction will be funded entirely with existing cash on hand. We believe the acquisition strengthens our global ITO presence by adding a base of UK operations, including two data centers, and expanding our global reach.

We entered into a zero cost interest rate collar on January 28, 2008. The collar is designated as a cash flow hedge of forecasted interest payments associated with our floating rate debt, and contains an interest rate cap of 3.281% and a floor of 2.425%. The notional amount of the collar is $500 million, which combined with our $700 million interest rate swap, hedges $1.2 billion of our floating rate debt. The interest rate collar was executed in two transactions each having two year turns, $300 million of which expires on January 30, 2010 and $200 million of which expires February 11, 2010. The transaction had a fair market value of zero at inception.

REVENUE GROWTH

In the first quarter of fiscal year 2008, we reorganized the internal operating and reporting structures in our Commercial and Government segments to more formally align our sales, service delivery and financial organizations under its appropriate leadership. As a result, we have restated our Commercial and Government segment results for prior periods to reflect our current operating and reporting structure. The restatement has no impact on our consolidated results for the period of restatement.

Internal revenue growth is measured as total revenue growth less acquired revenue from acquisitions and revenues from divested operations. At the date of acquisition, we identify the trailing twelve months of revenue of the acquired company as the “pre-acquisition revenue of acquired companies.” Pre-acquisition revenue of the acquired companies is considered “acquired revenues” in our calculation, and revenues from the acquired company, either above or below that amount are components of “internal growth” in our calculation. We use the calculation of internal revenue growth to measure revenue growth excluding the impact of acquired revenues and the revenue associated with divested operations and we believe these adjustments to historical reported results are necessary to accurately reflect our internal revenue growth. Revenues from divested operations are excluded from the internal revenue growth calculation in the periods following the effective date of the divestiture. Prior period internal revenue growth calculations are not restated for current period divestitures. Our measure of internal revenue growth may not be comparable to similarly titled measures of other companies. The following table sets forth the calculation of internal revenue growth (in thousands):

		Three Months Ended December 31,																Six Months Ended December 31,
		2007				2006				$ Growth				Growth %				2007				2006				$ Growth				Growth %
Consolidated
Total Revenues		$	1,511,442			$	1,426,761			$	84,681				6	%		$	3,004,525			$	2,812,199			$	192,326				7	%
Less: Divestitures			—				(271	)			271								—				(856	)			856
Adjusted		$	1,511,442			$	1,426,490			$	84,952				6	%		$	3,004,525			$	2,811,343			$	193,182				7	%
Acquired revenues		$	11,179			$	168			$	11,011				1	%		$	37,715			$	168			$	37,547				1	%
Internal revenues			1,500,263				1,426,322				73,941				5	%			2,966,810				2,811,175				155,635				6	%
Total		$	1,511,442			$	1,426,490			$	84,952				6	%		$	3,004,525			$	2,811,343			$	193,182				7	%
Commercial
Total Revenues		$	903,022			$	849,470			$	53,552				6	%		$	1,781,901			$	1,681,609			$	100,292				6	%
Less: Divestitures			—				—				—								—				—				—
Adjusted		$	903,022			$	849,470			$	53,552				6	%		$	1,781,901			$	1,681,609			$	100,292				6	%
Acquired revenues		$	4,127			$	—			$	4,127				0	%		$	23,611			$	—			$	23,611				1	%
Internal revenues			898,895				849,470				49,425				6	%			1,758,290				1,681,609				76,681				5	%
Total		$	903,022			$	849,470			$	53,552				6	%		$	1,781,901			$	1,681,609			$	100,292				6	%
Government
Total Revenues		$	608,420			$	577,291			$	31,129				5	%		$	1,222,624			$	1,130,590			$	92,034				8	%
Less: Divestitures			—				(271	)			271								—				(856	)			856
Adjusted		$	608,420			$	577,020			$	31,400				5	%		$	1,222,624			$	1,129,734			$	92,890				8	%
Acquired revenues		$	7,052			$	168			$	6,884				1	%		$	14,104			$	168			$	13,936				1	%
Internal revenues			601,368				576,852				24,516				4	%			1,208,520				1,129,566				78,954				7	%
Total		$	608,420			$	577,020			$	31,400				5	%		$	1,222,624			$	1,129,734			$	92,890				8	%