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 March 31, 2006

OR

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

Not Applicable

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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

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		May 11, 2006
Class A Common Stock, $.01 par value		111,972,827
Class B Common Stock, $.01 par value		6,599,372

 

 

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

INDEX

						PAGE
PART I.				FINANCIAL INFORMATION		NUMBER
Item 1.		Consolidated Financial Statements:
				Consolidated Balance Sheets at March 31, 2006 and June 30, 2005			1
				Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2006 and 2005			2
				Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005			3
				Notes to Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					23
Item 3.		Quantitative and Qualitative Disclosures about Market Risk					46
Item 4.		Controls and Procedures					46
PART II.				OTHER INFORMATION
Item 1.		Legal Proceedings					47
Item 1A.		Risk Factors					49
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					53
Item 6.		Exhibits					54
Form of Stock Option Agreement
Form of Stock Option Agreement
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO Pursuant to Rule 13a-14(b)
Certification of CFO Pursuant to Rule 13a-14(b)

PART I

		March 31,				June 30,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	174,877			$	62,685
Accounts receivable, net			1,167,374				1,061,590
Prepaid expenses and other current assets			174,741				119,822
Assets held for sale			6,173				—
Total current assets			1,523,165				1,244,097
Property, equipment and software, net			818,247				677,241
Goodwill			2,395,320				2,334,655
Other intangibles, net			465,757				466,312
Other assets			185,254				128,533
Total assets		$	5,387,743			$	4,850,838
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	102,969			$	62,788
Accrued compensation and benefits			158,390				175,782
Other accrued liabilities			445,449				471,577
Income taxes payable			5,267				2,310
Deferred taxes			25,552				34,996
Current portion of long-term debt			22,285				6,192
Current portion of unearned revenue			106,697				84,469
Total current liabilities			866,609				838,114
Senior Notes, net of unamortized discount			499,348				499,288
Other long-term debt			865,960				251,067
Deferred taxes			299,800				240,210
Other long-term liabilities			203,700				183,731
Total liabilities			2,735,417				2,012,410
Commitments and contingencies (See Notes 14 and 17)
Stockholders’ equity:
Class A common stock			1,404				1,379
Class B common stock			66				66
Additional paid-in capital			1,914,384				1,792,629
Accumulated other comprehensive loss, net			(15,983	)			(10,910	)
Retained earnings			2,291,392				2,016,197
Treasury stock at cost, 28,509 and 19,255 shares, respectively			(1,538,937	)			(960,933	)
Total stockholders’ equity			2,652,326				2,838,428
Total liabilities and stockholders’ equity		$	5,387,743			$	4,850,838

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

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
Revenues		$	1,314,455			$	1,063,299			$	3,972,959			$	3,136,767
Cost of revenues:
Wages and benefits			643,651				452,794				1,904,659				1,320,612
Services and supplies			272,990				251,825				869,651				777,893
Rent, lease and maintenance			156,489				124,047				475,202				364,164
Depreciation and amortization			72,891				57,801				211,415				167,706
Other			20,303				4,893				32,061				13,038
Cost of revenues			1,166,324				891,360				3,492,988				2,643,413
Gain on sale of business			(2,717	)			—				(32,482	)			—
Other operating expenses			12,430				6,127				43,278				17,577
Total operating expenses			1,176,037				897,487				3,503,784				2,660,990
Operating income			138,418				165,812				469,175				475,777
Interest expense			14,967				3,688				40,428				10,512
Other non-operating (income) expense, net			589				(466	)			(5,786	)			(1,808	)
Pretax profit			122,862				162,590				434,533				467,073
Income tax expense			44,986				47,924				159,337				162,105
Net income		$	77,876			$	114,666			$	275,196			$	304,968
Earnings per share:
Basic		$	0.63			$	0.90			$	2.20			$	2.38
Diluted		$	0.62			$	0.88			$	2.17			$	2.33
Shares used in computing earnings per share:
Basic			124,347				127,568				124,879				128,048
Diluted			126,319				130,229				126,806				131,081

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

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

		Nine Months Ended
		March 31,
		2006				2005
Cash flows from operating activities:
Net income		$	275,196			$	304,968
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			211,415				167,706
Stock-based compensation expense			25,364				—
Excess tax benefits from stock-based compensation arrangements			(17,302	)			—
Tax benefit on stock options			—				20,612
Gain on sale of business			(32,482	)			(70	)
Provision for uncollectible accounts receivable			7,986				773
Deferred income tax expense			50,397				56,523
Asset impairments			14,450				—
Contract inducement amortization			11,627				10,086
Gain on investments			(5,441	)			(1,860	)
Loss on early extinguishment of long-term debt			4,104				—
Other non-cash activities			4,131				794
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable			(41,591	)			(16,633	)
Increase in prepaid expenses and other current assets			(15,399	)			(17,660	)
(Increase) decrease in other assets			5,959				(1,436	)
Increase (decrease) in accounts payable			25,841				(14,606	)
Decrease in accrued compensation and benefits			(20,387	)			(28,557	)
Decrease in other accrued liabilities			(106,214	)			(49,217	)
Increase in income taxes payable			32,837				3,774
Increase in unearned revenue			40,513				26,457
Increase (decrease) in other long-term liabilities			(2,544	)			10,319
Total adjustments			193,264				167,005
Net cash provided by operating activities			468,460				471,973
Cash flows from investing activities:
Purchases of property, equipment and software, net			(290,108	)			(170,185	)
Payments for acquisitions, net of cash acquired			(155,229	)			(213,322	)
Additions to other intangible assets			(28,386	)			(29,444	)
Proceeds from divestitures, net of transaction costs			67,664				87
Intangible assets acquired in subcontract termination			(16,530	)			—
Proceeds from investments			1,903				46
Purchases of investments			(25,456	)			(6,604	)
Proceeds received on notes receivable			—				425
Net cash used in investing activities			(446,142	)			(418,997	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net			3,334,917				1,341,163
Repayments of long-term debt			(2,759,272	)			(1,342,456	)
Proceeds from stock options exercised			82,010				28,868
Executive stock option settlement			(18,353	)			—
Excess tax benefits from stock-based compensation arrangements			17,302				—
Purchase of shares in tender offer			(466,071	)			—
Purchase of treasury shares			(115,804	)			(131,121	)
Proceeds from issuance of treasury shares			15,145				20,203
Net cash provided by (used in) financing activities			89,874				(83,343	)
Net increase (decrease) in cash and cash equivalents			112,192				(30,367	)
Cash and cash equivalents at beginning of period			62,685				76,899
Cash and cash equivalents at end of period		$	174,877			$	46,532

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

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

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Affiliated Computer Services, Inc. (“ACS” or the “Company”) and its majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. We are a Fortune 500 and S&P 500 company with more than 55,000 people providing business process and information technology outsourcing solutions to commercial and government clients.

The financial information presented should be read in conjunction with our consolidated financial statements for the year ended June 30, 2005. The foregoing unaudited consolidated financial statements reflect all adjustments (all of which are of a normal recurring nature), which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods. The results for the interim periods are not necessarily indicative of results to be expected for the year. Prior period amounts have been reclassified to conform to current period presentation.

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.

Significant accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2005. For discussion of our critical accounting policies, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

2. STOCK-BASED COMPENSATION

See Note 3 below for information concerning an ongoing internal investigation into our 1994 to date stock option grant practices. The information in this Note 2 is qualified by reference to the information set forth in Note 3 to the extent applicable.

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. SFAS 123(R) is effective beginning as of the first annual reporting period beginning after June 15, 2005. We adopted SFAS 123(R) on a prospective basis beginning July 1, 2005 for stock-based compensation awards granted after that date and for unvested awards outstanding at that date using the modified prospective application method. We recognize the fair value of stock-based compensation awards as wages and benefits in the Consolidated Statements of Income on a straight-line basis over the vesting period.

Prior to July 1, 2005, we followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) in accounting for our stock-based compensation plans. Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant date under those plans consistent with the fair value method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), our net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

		Three Months Ended				Nine Months Ended
		March 31, 2005				March 31, 2005
Net Income
As reported		$	114,666			$	304,968
Less: Pro forma cost of employee stock-based compensation plans, net of income taxes of $3,241 and $9,577, respectively			(5,759	)			(17,074	)
Pro forma		$	108,907			$	287,894
Basic earnings per share
As reported		$	0.90			$	2.38
Pro forma		$	0.85			$	2.25
Diluted earnings per share
As reported		$	0.88			$	2.33
Pro forma		$	0.84			$	2.21

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

The adoption of SFAS 123(R) in the first quarter of fiscal year 2006 resulted in prospective changes in our accounting for stock-based compensation awards including recording stock-based compensation expense and the related deferred income tax benefit on a prospective basis and reflecting the excess tax benefit from the exercise of stock-based compensation awards in cash flows from financing activities.

The adoption of SFAS 123(R) resulted in the recognition of compensation expense of $8 million and $25.4 million ($5.1 million and $16.7 million, net of deferred income tax benefits), or $0.04 and $0.13 per diluted share, in wages and benefits in the Consolidated Statements of Income for the three and nine months ended March 31, 2006, respectively. In accordance with the modified prospective application method of SFAS 123(R), prior period amounts have not been restated to reflect the recognition of stock-based compensation costs. The total compensation cost related to non-vested awards not yet recognized at March 31, 2006 was approximately $83.3 million, which is expected to be recognized over a weighted average of 3.31 years.

In periods ending prior to July 1, 2005, the income tax benefits from the exercise of stock options were classified as net cash provided by operating activities pursuant to Emerging Issues Task Force Issue No. 00-15 “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” However, for periods ending after July 1, 2005, pursuant to SFAS 123(R), the income tax benefits exceeding the recorded deferred income tax benefit and any pre-adoption “as-if” deferred income tax benefit from stock-based compensation awards (the excess tax benefits) are required to be reported in net cash provided by financing activities. For the nine months ended March 31, 2006, excess tax benefits from stock-based compensation awards of $17.3 million were reflected as an outflow in cash flows from operating activities and an inflow in cash flows from financing activities in the Consolidated Statements of Cash Flows, resulting in a net impact of zero on cash. In the prior year period, income tax benefits from the exercise of stock options of $20.6 million were reflected as an inflow in cash flows from operating activities in the Consolidated Statements of Cash Flows.

Under our 1997 Stock Incentive Plan (the “Stock Incentive Plan”), we originally reserved approximately 7.4 million shares of Class A common stock for issuance to key employees at exercise prices determined by the Board of Directors or designated committee thereof. In May 2000, February 2001, October 2001, July 2003, February 2005 and July 2005, the Board of Directors approved the additional allotment of approximately 1.7 million, 1.6 million, 4.1 million, 3.8 million, 2.7 million and 0.8 million shares, respectively, to the Stock Incentive Plan in accordance with the terms and conditions of the Stock Incentive Plan authorized by our shareholders pursuant to our November 14, 1997 Proxy Statement. Options granted under the Stock Incentive Plan to our current employees cannot exceed 12.8% of our issued and outstanding shares, and consequently, any share repurchases (as discussed in Notes 6 and 12) reduce the number of options to purchase shares that we may grant under the Stock Incentive Plan. Our 1988 Stock Option Plan (the “1988 Plan”), which originally reserved 12 million shares of Class A common stock for issuance, was discontinued for new grants during fiscal year 1998 and terminated (except for the exercise of then existing option grants as of September 1997) and subsequently, 3.2 million unissued shares expired. Generally, the options under each plan vest in varying increments over a five-year period, become exercisable as they vest (see discussion of amendment below) and expire ten years from the date of grant.

In order to conform our stock option program with standard market practice, on February 2, 2005, our Board of Directors approved an amendment to stock options previously granted that did not become exercisable until five years from the date of grant to provide that such options become exercisable on the day they vest. Options granted under both our Stock Incentive Plan and our 1988 Plan generally vest in varying increments over a five year period. It is expected that future option grants will contain matching vesting and exercise schedules, which we believe will result in a lower expected term. This amendment does not amend or affect the vesting schedule, exercise price, quantity of options granted, shares into which such options are exercisable or life of any award under any outstanding option grant. Therefore, no compensation expense was recorded.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model utilizing the assumptions noted below. The expected volatility of our stock price is based on historical monthly volatility over the expected term based on daily closing stock prices. The expected term of the option is based on historical employee stock option exercise behavior, the vesting term of the respective award and the contractual term. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Our stock price volatility and expected option lives are based on management’s best estimates at the time of grant, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting term of the option. The weighted-average fair value of options granted was $13.88 for the three months ended March 31, 2005 and $12.98 and $15.56 for the nine months ended March 31, 2006 and 2005, respectively. There were no option grants for the three months ended March 31, 2006. The weighted-average fair value of options granted has declined in the nine months ended March 31, 2006 compared to the prior year period due primarily to decreased volatility and expected term. The estimated fair value is not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

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

The following weighted-average assumptions were used to determine the fair value of grants. We issued no new grants in the third quarter of fiscal year 2006.

		Nine Months ended
		March 31, 2006
Expected volatility			22.20	%
Expected term		4.21 years
Risk-free interest rate			3.49	%
Expected dividend yield			0	%

As discussed above, prior to the adoption of SFAS 123(R), we determined the fair value of grants for disclosure of pro forma stock-based compensation costs in accordance with SFAS 123. We used the following weighted-average assumptions to determine the fair value of grants:

		Three Months ended				Nine Months ended
		March 31, 2005				March 31, 2005
Expected volatility			22.95	%			25.24	%
Expected term		4.50 years				4.92 years
Risk-free interest rate			4.01	%			3.97	%
Expected dividend yield			0	%			0	%

The total intrinsic value of options exercised during the three and nine months ended March 31, 2006 was $41.1 million and $64.9 million, respectively, resulting in income tax benefits of $14.9 million and $23.5 million, respectively. In addition, we also recorded income tax benefits of $6.7 million in the first quarter of fiscal year 2006 related to the purchase of vested options from our former Chief Executive Officer (see Note 18 for further discussion). Of the total income tax benefit of $30.2 million for the nine months ended March 31, 2006, $17.3 million is reflected as excess tax benefits in net cash provided by financing activities in the Consolidated Statements of Cash Flows.

Option activity for the three and nine months ended March 31, 2006 is summarized as follows:

										Weighted-
										Average
						Weighted				Remaining				Aggregate
						Average				Contractual				Intrinsic Value
		Options				Exercise Price				Term				(in thousands)
Outstanding at December 31, 2005			13,746,960			$	41.76
Granted			—				—
Exercised			(1,477,250	)			34.67
Canceled			(316,100	)			50.34
Outstanding as of March 31, 2006			11,953,610			$	42.41				7.22			$	206,247
Outstanding at June 30, 2005			15,356,700			$	39.61
Granted			1,588,500				53.05
Exercised			(2,504,690	)			32.81
Canceled (1)			(2,486,900	)			41.57
Outstanding as of March 31, 2006			11,953,610			$	42.41				7.22			$	206,247
Vested and exercisable at March 31, 2006			4,037,160			$	33.17				5.60			$	106,946

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

SFAS 123(R) requires that we recognize compensation expense for only the portion of share-based payment arrangements that are expected to vest. Therefore, we apply estimated forfeiture rates that are based on historical employee termination behavior. We periodically adjust the estimated forfeiture rates so that only the compensation expense related to share-based payment arrangements that vest are included in wages and benefits. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

We follow the transition method described in SFAS 123(R) for calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R) (the “APIC Pool”). Tax deficiencies arise when actual tax benefits we realize upon the exercise of stock options are less than the recorded tax benefit. In November 2005, the Financial Accounting Standards Board issued FASB Staff Position FAS 123(R)-3, “Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP FAS 123(R)-3”), which provides an alternative one-time transition election for calculating the APIC Pool. We are currently evaluating whether to elect the one-time transition election provided in FSP FAS 123(R)-3.

3. REVIEW OF STOCK OPTION GRANT PROCEDURES

As previously announced, we received a letter dated March 1, 2006 from the Securities and Exchange Commission (the “SEC”) informing us that the SEC had begun an informal investigation into stock option grants made by us from October 1998 through March 2005. We are cooperating with the SEC in connection with its investigation.

At the direction of our Board of Directors, in response to the informal SEC investigation noted above, we have commenced an internal investigation through our regular outside counsel into our historical stock option practices from 1994 to the present under our stock option plans in effect during this period, including a review of our underlying option grant documentation and procedures. Our internal investigation is ongoing and not complete as of the date of this filing.

As explained more fully below, during our entire history as a public company, our regular and special compensation committees have generally utilized unanimous written consents signed by all members of the applicable committee ratifying their prior verbal approvals of option grants to senior executives or options to be granted in connection with significant acquisitions. We believe the prior verbal approvals of the committee members generally occurred contemporaneously with the legal effective date specified in the unanimous written consent of the committee members. Our legal counsel has advised us that our written consent process with deemed effective dates is valid under Delaware corporate law and our stock option plans. However, we have determined, in consultation with our independent registered public accounting firm, that although the option grants are legally valid and enforceable as of the effective date set forth in the unanimous consents, the proper measurement date, for accounting purposes only, may differ from the legal effective date.

Historically, we have granted stock options principally utilizing a process whereby our compensation committee or special compensation committee, as applicable, would approve stock option grants through unanimous written consents with specified effective dates that generally preceded the date on which the consents had been executed by all members of the applicable compensation committee. In connection with option grants to senior executives, the historical practice was for our chairman, who during periods prior to September 2003 was also a member of our compensation committee, to engage, on a generally contemporaneous basis with the effective date specified in the written consent, in individual telephonic discussions with each of the members of the applicable compensation committee, during which the committee member would indicate his approval of the option grants in question. In connection with significant acquisitions, our historical practice was for the Board of Directors (including members of the applicable compensation committee) to consider during board meetings convened for the purpose of approving an acquisition the proposed stock option component that would be designated to an acquisition target’s management team, with a unanimous written consent of the applicable compensation committee to follow at a later time with a specified effective date for the option grants in question.

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

Based on our option grant procedures, we have historically considered the effective date specified in the written consents by the applicable compensation committee as the accounting measurement date for determining stock-based compensation expense under APB 25 and SFAS 123(R). However, we have determined, in consultation with our independent registered public accounting firm, that the proper accounting measurement date for stock option awards cannot precede the date on which the grants were approved through the execution of written consents or through a valid meeting of the applicable compensation committee. Notwithstanding our accounting determination noted above, we believe that (i) our historical written consent effective date process is permitted under our current and predecessor stock option plans and Delaware corporate law, (ii) we have consistently followed this process in prior accounting periods, and (iii) the grants in question had been verbally discussed and approved by each of the members of the applicable compensation committee generally on a contemporaneous basis with the specified effective date of those grants.

Accordingly, based on the preliminary results of our review of our historical stock option practices, including our underlying option grant documentation and procedures, and the initial findings of our internal investigation (which is ongoing and not complete as of the date of this filing), we have determined that the estimated cumulative pretax stock-based compensation charge resulting from revised measurement dates is approximately $32 million ($21 million, net of income tax) at June 30, 2005. Based on this preliminary estimate, had this estimated compensation charge been reflected, as and when incurred, in our results of operations in prior years, the impact on net income for fiscal years ended June 30, 2001, 2002, 2003, 2004 and 2005 would have been a reduction of 1.9%, 1.6%, 1.5%, 0.7%, and 0.7%, respectively. The potential impact of this estimated compensation charge for the fiscal years ended June 30, 2006 and beyond is estimated to be immaterial based on currently available information. There would be no impact on revenue or net cash provided by operating activities as a result of the estimated compensation charge. This estimated stock-based compensation charge relates to certain of the option grants covering approximately 23 million common shares (after giving effect to forfeitures of option grants covering approximately 7 million common shares) issued by us subsequent to our initial public offering in 1994 and through June 30, 2005. During this same period, we recorded a cumulative pretax profit of approximately $3.2 billion ($2.0 billion, net of income tax).

Our internal investigation is ongoing and not complete as of the date of this filing, therefore, should additional information become available, our preliminary estimate of stock-based compensation could change. Accordingly, once our internal investigation is completed, we will conclude as to whether the cumulative stock-based compensation charge will be recorded in our fourth quarter of fiscal year 2006 or will result in a restatement of prior period financial statements. Based on the current estimate of the stock-based compensation charge, we do not believe that restatement of prior period financial information will be required.

In conjunction with this investigation, we are also evaluating whether any previously deducted compensation related to exercised stock options may be non-deductible under Section 162(m) of the Internal Revenue Code. In that event, we may be required to pay additional taxes and interest associated with previous compensation deductions in connection with such exercised stock options and we may lose additional deductions in future periods. We currently estimate that the amount of any lost tax deductions claimed on previously filed income tax returns will not be material to our consolidated results of operations or financial position, although we have not finalized our assessment of this matter.

Notwithstanding the above-referenced accounting determination, based on the initial findings of our internal investigation (which is ongoing and not complete as of the date of this filing), we do not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price.

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

4. ACQUISITIONS

In December 2005, we completed the acquisition of the Transport Revenue division of Ascom AG (“Ascom”), a Switzerland based communications company. Ascom consists of three business units — fare collection, airport parking solutions and toll collection with office locations across nine countries. The transaction was valued at approximately $100.5 million plus related transaction costs and was funded from borrowings under our Prior Facility (as defined in Note 11). The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value as of the date of acquisition. We acquired assets of $234.1 million and assumed liabilities of $133.6 million. We recorded goodwill of $70.7 million, approximately 31% of which is deductible for income tax purposes, and intangible assets of $1.3 million. The $1.3 million of intangible assets is attributable to customer relationships, non-compete agreements and patents with weighted average useful lives of approximately 8 years. We believe this acquisition launches us into the international transportation services industry and will expand our portfolio in the transit and parking payment markets and adds toll collection customers to our existing customer base. The operating results of the acquired business are included in our financial statements in the Government segment from the effective date of the acquisition, December 1, 2005.

In July 2005, we completed the acquisition of LiveBridge, Inc. (“LiveBridge”), a customer care service provider primarily serving the financial and telecommunications industries. The transaction was valued at approximately $32 million plus a working capital adjustment of $2.5 million, excluding contingent consideration of up to $32 million based upon future financial performance and was funded from cash on hand and borrowings under our Prior Facility. The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value as of the date of acquisition. We acquired assets of $42 million and assumed liabilities of $7.5 million. We recorded goodwill of $11.5 million, 49% of which is deductible for income tax purposes, and intangible assets of $12.9 million. The $12.9 million of intangible assets is attributable to customer relationships and non-compete agreements with weighted average useful lives of approximately 6 years. We believe this acquisition will expand our customer care service offerings in the finance and telecommunications industries and will extend our global capabilities and operations by adding the LiveBridge operational centers in Canada, India and Argentina. The operating results of the acquired business are included in our financial statements in the Commercial segment from the effective date of the acquisition, July 1, 2005.

We completed one small acquisition in our Government segment in the third quarter of fiscal year 2006.

These acquisitions are not considered material to our results of operations, either individually or in the aggregate; therefore, no pro forma information is presented.

5. SALE OF GOVERNMENT WELFARE-TO-WORKFORCE SERVICES BUSINESS

In December 2005, we completed the divestiture of substantially all of our Government welfare-to-workforce services business to Arbor E&T, LLC (“Arbor”), a wholly owned subsidiary of ResCare, Inc., for approximately $69 million, less transaction costs. The proceeds were collected in the third quarter of fiscal year 2006. The Government welfare-to-workforce services business is no longer strategic or core to our operating philosophy. This divestiture allows us to focus on our technology-enabled business process outsourcing and information technology outsourcing service offerings. Assets sold were approximately $29.1 million and liabilities assumed by Arbor were approximately $0.2 million, both of which were included in the Government segment. We retained the net working capital related to the welfare-to-workforce services business. We recognized a pretax gain of $29.8 million ($17.9 million, net of income tax) in the second quarter of fiscal year 2006 and $2.7 million ($1.6 million, net of income tax) in the third quarter of fiscal year 2006, upon the assignment of certain customer contracts during the quarter. Approximately $3.5 million of the consideration relates to certain customer contracts whose assignment to Arbor was not complete as of March 31, 2006, and is reflected as deferred proceeds in other accrued liabilities in our Consolidated Balance Sheet as of March 31, 2006. We expect to complete the transfer of these remaining contracts to Arbor by the end of fiscal year 2006 upon receipt of customer consents. The after tax proceeds from the divestiture were generally used for general corporate purposes.

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

In the second quarter of fiscal year 2006, we recorded a provision for an estimated litigation settlement related to the welfare-to-workforce services business. In connection with the transfer of the contracts and ongoing customer relationships to Arbor and due to a change in our estimate of collectibility of the retained outstanding receivables, we recorded a provision for uncollectible accounts receivable related to the welfare-to-workforce services business. Total provisions recorded were $3.3 million ($2.1 million, net of income tax).

Revenues from the divested business were $2.9 million and $51.3 million for the three months ended March 31, 2006 and 2005, respectively, and $104 million and $164.6 million for the nine months ended March 31, 2006 and 2005, respectively. Operating income from the divested business, excluding the gain on sale, was $0.1 million and $5.3 million for the three months ended March 31, 2006 and 2005, respectively, and $6.4 million and $16.2 million for the nine months ended March 31, 2006 and 2005, respectively.

6. TENDER OFFER

On January 26, 2006, we announced that our Board of Directors authorized a modified “Dutch Auction” tender offer to purchase up to 55.5 million shares of our Class A common stock at a price per share not less than $56 and not greater than $63 (the “Tender Offer”). The Tender Offer commenced on February 9, 2006, and expired on March 17, 2006 (as extended), and was funded with proceeds from the Term Loan Facility (defined below). Our directors and executive officers, including our Chairman, Darwin Deason, did not tender shares pursuant to the Tender Offer. The number of shares purchased in the Tender Offer was 7,365,110 shares of Class A common stock at an average price of $63 per share plus transaction costs, for an aggregate purchase amount of $475.9 million. As of March 31, 2006, 3,371 of the shares purchased in the Tender Offer were retired and the remaining shares purchased in the Tender Offer, with an aggregate purchase amount of $475.7 million (including transaction costs), were reported in treasury stock as of March 31, 2006 and retired in April 2006.

Prior to the Tender Offer, Darwin Deason, our Chairman of our Board of Directors, held approximately 36.7% of the total outstanding voting power of the Company through his ownership of Class A shares (which have one vote per share) and Class B shares (which have ten votes per share). Mr. Deason did not tender any of the Class A shares held by him in connection with the Tender Offer. As a result of the Tender Offer, Mr. Deason’s voting power increased from 36.7% to approximately 38.2% of the total outstanding voting power of the Company.

However, Mr. Deason entered into a Voting Agreement with the Company dated February 9, 2006 (the “Voting Agreement”) in which he agreed to limit his ability to cause the additional voting power he would hold as a result of the Tender Offer to affect the outcome of any matter submitted to the vote of the shareholders of the Company after consummation of the Tender Offer. Mr. Deason agreed that to the extent his voting power immediately after the Tender Offer increased above the percentage amount of his voting power immediately prior to the Tender Offer (such increase is approximately 1.5%), Mr. Deason would cause the shares representing such additional voting power (the “Excess Voting Power”) to appear, not appear, vote or not vote at any meeting or pursuant to any consent solicitation in the same manner, and in proportion to, the votes or actions of all shareholders including Mr. Deason whose Class A and Class B shares shall, solely for the purpose of proportionality, be counted on a one for one vote basis (even though the Class B shares have ten votes per share).

The Voting Agreement will have no effect on shares representing the approximately 36.7% voting power of the Company held by Mr. Deason prior to the Tender Offer, which Mr. Deason will continue to have the right to vote in his sole discretion. The Voting Agreement also does not apply to any Class A shares that Mr. Deason may acquire after the Tender Offer through his exercise of stock options, open market purchases or in any future transaction that we may undertake. Other than as expressly set forth in the Voting Agreement, Mr. Deason continues to have the power to exercise all rights attached to the shares he owns, including the right to dispose of his shares and the right to receive any distributions thereon.

The Voting Agreement will terminate on the earliest of (i) the mutual agreement of the Company (authorized by not less than a majority of the vote of the then independent and disinterested directors) and Mr. Deason, (ii) the date on which Mr. Deason ceases to hold any Excess Voting Power, as calculated in the Voting Agreement, or (iii) the date on which all Class B shares are converted into Class A shares.

A special committee of the Board of Directors, consisting of our four independent directors, will engage in good faith discussions with Mr. Deason to reach agreement on fair compensation to be paid to Mr. Deason for entering into the Voting Agreement within six months following the closing of the Tender Offer. However, whether or not Mr. Deason and our special committee are able to reach agreement on compensation to be paid to Mr. Deason, the Voting Agreement will remain in effect.

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

This summary of the Voting Agreement is qualified in its entirety by the terms of the Voting Agreement, which is filed as an exhibit hereto.

7. RESTRUCTURING AND OTHER ACTIVITIES

During the second quarter of fiscal year 2006, and in connection with our new executive leadership, 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 initiated certain restructuring initiatives and activities that are expected to enhance our competitive position in certain markets, and recorded certain restructuring charges and asset impairments arising from our discretionary decisions. We estimate a total of 2,100 employees will be 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 will be migrated to lower cost markets. As of March 31, 2006, approximately 900 employees had been involuntarily terminated. We anticipate the costs savings related to these involuntary terminations will be approximately $29 million of wages and benefits per year beginning in fiscal year 2007; however, some of the cost savings from these involuntary terminations will be reinvested in subject matter experts, project management talent and sales personnel as we look to further promote those lines of businesses that reflect the most potential for growth. We expect that our assessment activities will be two-thirds complete by the end of the fourth quarter of fiscal year 2006, which may result in further restructuring and related charges, the amount and timing of which cannot be determined at this time.

In our Commercial segment, we began an assessment of the cost structure of our global production model, particularly our offshore processing activities. We identified offshore locations in which our labor costs are no longer competitive or where the volume of work processed by the site no longer justifies retaining the location, including one of our Mexican facilities. In connection with this assessment, we recorded a restructuring charge for involuntary termination of employees related to the closure of those duplicative facilities of $1.6 million and $6.0 million for the three and nine months ended March 31, 2006, respectively, which is reflected in wages and benefits in our Consolidated Statements of Income, and $1.4 million and $1.7 million for the three and nine months ended March 31, 2006, respectively, for impairments of duplicative technology equipment and facility costs, facility shutdown and other costs, which are reflected as part of total operating expenses in our Consolidated Statements of Income. We expect these activities will consolidate our global production activities and enhance our competitive position.

In our Government segment, we began an assessment of our competitive position, evaluated our market strategies, and the technology used to support certain of our service offerings. We began to implement operating practices that we utilize in our Commercial segment, including leveraging our proprietary workflow technology and implementing activity-based-compensation, which is expected to reduce our operating costs and enhance our competitive position. In connection with these activities, we recorded a restructuring charge for involuntary termination of employees of $0.7 million and $1 million for the three and nine months ended March 31, 2006, which is reflected in wages and benefits in our Consolidated Statements of Income, $0.3 million and $1.7 million for the three and nine months ended March 31, 2006 for asset impairment and other charges, principally for duplicative software as a result of recent acquisition activity, and is reflected in total operating expenses in our Consolidated Statements of Income. As discussed earlier, we completed the sale of substantially all of our welfare-to-workforce services business, which allows us to focus on our technology-enabled business process outsourcing and information technology outsourcing service offerings.

In our Corporate segment, we determined that the costs related to the ownership of a corporate aircraft outweighed the benefits to the Company. We recorded an asset impairment charge of $4.4 million in the nine months ended March 31, 2006 related to the corporate aircraft, which is reflected in other operating expenses in our Consolidated Statements of Income, in connection with its classification as held for sale. In March 2006, we entered into a letter of intent to sell the corporate aircraft for approximately $4 million, less transaction costs. We expect the transaction to be completed during the fourth quarter of fiscal year 2006.

The following table summarizes activity for the accrual for involuntary termination of employees for the three and nine ended March 31, 2006 (in thousands):

Balance at December 31, 2005		$	2,783
Accrual recorded			2,348
Payments			(1,860	)
Balance at March 31, 2006		$	3,271
Balance at June 30, 2005		$	—
Accrual recorded			7,019
Payments			(3,748	)
Balance at March 31, 2006		$	3,271

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

The March 31, 2006 accrual for involuntary termination of employees is expected to be paid in the fourth quarter of fiscal year 2006 from cash flows from operating activities.

As part of our acquisition of the human resources consulting and outsourcing business of Mellon Financial Corporation (the “Acquired HR Business”) in the fourth quarter of fiscal year 2005, we recorded $22.3 million in involuntary employee termination costs for employees of the Acquired HR Business in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” During the first nine months of fiscal year 2006, $11.7 million in involuntary employee termination payments have been made and charged against accrued compensation. As of March 31, 2006, the balance of the related accrual was $8.7 million and is expected to be paid by the end of the first quarter of fiscal year 2007 from cash flows from operating activities.

8. ASSETS HELD FOR SALE

At March 31, 2006, we classified as assets held for sale certain customer contracts in our Government welfare-to-workforce services business whose transfer to Arbor was not complete as of March 31, 2006 (see Note 5). In addition, as part of our restructuring activities to reduce costs, in the second quarter of fiscal year 2006, we classified the fair value of our corporate aircraft as held for sale (see Note 7). During the nine months ended March 31, 2006, we recognized an impairment loss in other operating expenses of $4.4 million related to our corporate aircraft. The following table sets forth the assets included in assets held for sale as of March 31, 2006 (in thousands):

Assets held for sale
Intangible assets related to welfare-to-workforce services business, net		$	906
Goodwill related to welfare-to-workforce services business			1,567
Corporate aircraft			3,700
Total assets held for sale		$	6,173

9. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended March 31, 2006 are as follows (in thousands):

		Commercial				Government				Total
Balance as of June 30, 2005		$	1,217,727			$	1,116,928			$	2,334,655
Acquisition activity			5,065				73,352				78,417
Divested business			—				(16,185	)			(16,185	)
Assets held for sale			—				(1,567	)			(1,567	)
Balance as of March 31, 2006		$	1,222,792			$	1,172,528			$	2,395,320

Goodwill activity for the first nine months of fiscal year 2006 was primarily due to the acquisition of Ascom and LiveBridge (see Note 4), offset by the sale of our Government welfare-to-workforce services business (see Note 5). Approximately $2 billion, or 79.8%, of the original gross amount of goodwill recorded is deductible for income tax purposes.

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

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

		March 31, 2006								June 30, 2005
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Acquired customer-related intangibles		$	364,379			$	(95,424	)		$	377,314			$	(76,515	)
Customer-related intangibles			215,777				(83,548	)			175,571				(74,336	)
All other			15,052				(5,367	)			12,708				(3,318	)
Total		$	595,208			$	(184,339	)		$	565,593			$	(154,169	)
Unamortized intangible assets:
Title plant		$	51,045							$	51,045
Trade name			3,843								3,843
Total		$	54,888							$	54,888
Aggregate Amortization:
For the quarter ended March 31, 2006										$	17,613
For the quarter ended March 31, 2005											14,018
For the nine months ended March 31, 2006											53,714
For the nine months ended March 31, 2005											41,270
Estimated amortization for the years ended June 30,
2006										$	73,760
2007											68,614
2008											65,625
2009											56,762
2010											44,112

Aggregate amortization includes amounts charged to amortization expense for customer-related intangibles and other intangibles, other than contract inducements. Amortization of contract inducements of $4.0 million and $3.8 million for the three months ended March 31, 2006 and 2005, respectively, and $11.6 million and $10.1 million for the nine months ended March 31, 2006 and 2005, respectively, is recorded as a reduction of related contract revenue. Amortization expense includes approximately $8.8 million and $6.9 million for acquired customer-related intangibles for the three months ended March 31, 2006 and 2005, respectively, and $28 million and $19.8 million for the nine months ended March 31, 2006 and 2005, respectively. Amortized 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. In the third quarter of fiscal year 2006, we recorded an asset impairment charge of $8.4 million related to a human resources client.

During the first nine months of fiscal year 2006, we acquired intangible assets of $16.5 million with a weighted average useful life of approximately 8 years in connection with the termination of a subcontractor arrangement.

10. PENSION AND OTHER POST-EMPLOYMENT PLANS

U.S. Pension Plan
In December 2005, we adopted a pension plan for the U.S. employees of Buck Consultants, LLC, a wholly owned subsidiary, which was acquired in connection with the Acquired HR Business. The U.S. pension plan is a funded plan. We have established June 30 as our measurement date for this defined benefit plan. The plan recognizes service for eligible employees from May 26, 2005, the date of the acquisition of the Acquired HR Business. We recorded prepaid pension costs and projected benefit obligation of $2.1 million related to this prior service which will be amortized over 8.7 years and included in the net periodic benefit costs which is included in wages and benefits in our Consolidated Statements of Income.

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

Multi-employer Pension Plan
A group of employees acquired with Ascom participate in a multi-employer pension plan in Switzerland. Contributions to the plan are not considered material to our Consolidated Statements of Income.

Net periodic benefit cost
The following table provides the components of net periodic benefit cost for the three and nine months ended March 31, 2006 (in thousands):

		Three Months ended								Nine Months ended
		March 31, 2006								March 31, 2006
		U.S. Plan				Non-U.S. Plans				U.S. Plan				Non-U.S. Plans
Components of net periodic benefit cost:
Defined benefit plans:
Service cost		$	1,035			$	1,140			$	1,380			$	3,705
Interest cost			30				1,024				40				3,351
Expected return on assets			(45	)			(1,096	)			(60	)			(3,541	)
Amortization of prior service cost			60				—				80				—
Net periodic benefit cost for defined benefit plans		$	1,080			$	1,068			$	1,440			$	3,515

We made contributions to the pension plans of approximately $3.4 million in the first nine months of fiscal year 2006. We expect to contribute between $7.2 million and $8.1 million to our pension plans in fiscal year 2006.

11. CREDIT AGREEMENT

On March 20, 2006, we entered into a Credit Agreement with Citicorp USA, Inc., as Administrative Agent (“Citicorp”), Citigroup Global Markets Inc., as Sole Lead Arranger and Book Runner, 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”). The Credit Facility provides for a senior secured term loan facility of $800 million, with the ability to increase it by up to $3 billion, under certain circumstances (the “Term Loan Facility”) and a senior secured revolving credit facility of $1 billion with the ability to increase it by up to $750 million (the “Revolving Facility”), each of which is described more fully below. At the closing of the Credit Facility, we and certain of our subsidiaries jointly borrowed approximately $800 million under the Term Loan Facility and approximately $93 million under the Revolving Facility. We used the proceeds of the Term Loan Facility to (i) refinance approximately $278 million in outstanding indebtedness under our 5-Year Competitive Advance and Revolving Credit Facility Agreement dated as of October 27, 2004 (the “Prior Facility”), (ii) finance the purchase of shares of our Class A common stock tendered in the Company’s “Dutch Auction” tender which expired March 17, 2006 (as extended) and (iii) for the payment of transaction costs, fees and expenses related to the Credit Facility and Dutch Auction. As a result of the refinancing of the Prior Facility, we wrote off approximately $4.1 million in debt issue costs, which was included in other non-operating (income) expense, net. A portion of the proceeds of the Revolving Facility were used to refinance approximately $73 million in outstanding indebtedness under the Prior Facility. The remainder of the proceeds of the Revolving Facility will be used for working capital purposes. In addition, approximately $114 million of letters of credit were issued under the Credit Facility to replace letters of credit outstanding under the Prior Facility. The Prior Facility was terminated on March 20, 2006.

Amounts borrowed under the Term Loan Facility mature on March 20, 2013, and will amortize in quarterly installments in an aggregate annual amount equal to 1% of the aggregate principal amount of the loans advanced, with the balance payable on the final maturity date. Interest on the outstanding balances under the Term Loan Facility is payable, at our option, at a rate equal to the Applicable Margin (as defined in the Credit Facility) plus the fluctuating Base Rate (as defined in the Credit Facility), or at the Applicable Margin plus the current LIBOR (as defined in the Credit Facility). The borrowing rate on the Term Loan Facility at March 31, 2006 was 6.28%.

Proceeds borrowed under the Revolving Facility will be used as needed for general corporate purposes. Amounts under the Revolving Facility are available on a revolving basis until the maturity date of March 20, 2012. The Revolving Facility allows for borrowings up to the full amount of the revolver in either U.S. Dollars or Euros. Up to the U.S. dollar equivalent of $200 million may be borrowed in other currencies, including Sterling, Canadian Dollars, Australian Dollars, Yen, Francs, Drones and New Zealand Dollars. Portions of the Revolving Facility are available for issuances of up to the U.S. dollar equivalent of $700 million of letters of credit and for borrowings of up to the U.S. dollar equivalent of $150 million of swing loans. Interest on outstanding balances under the

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

Revolving Facility is payable, at our option, at a rate equal to the Applicable Margin plus the fluctuating Base Rate, or at the Applicable Margin plus the current LIBOR for the applicable currency. The current interest rate payable under the Revolving Facility at March 31, 2006 ranges from 2.39% to 3.89%, depending upon the currency of the outstanding borrowings.

The Credit Facility includes an uncommitted accordion feature of up to $750 million in the aggregate allowing for future incremental borrowings under the Revolving Facility, which may be used for general corporate purposes. The Credit Facility also includes an additional uncommitted accordion feature of up to $3 billion allowing for future incremental borrowings under the Term Loan Facility which may be used to fund additional purchases of our equity securities or for extinguishment of our existing $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”).

Obligations under the Credit Facility are guaranteed by us and substantially all of our domestic subsidiaries and certain of our foreign subsidiaries (but only to the extent such guarantees would not result in materially adverse tax consequences). In addition, Credit Facility obligations are secured under certain pledge agreements by (i) a first priority perfected pledge of all notes owned by us and the guarantors and the capital stock of substantially all of our domestic subsidiaries and certain of our foreign subsidiaries (subject to certain exceptions, including to the extent the pledge would give rise to additional SEC reporting requirements for our subsidiaries or result in materially adverse tax consequences), and (ii) a first priority perfected security interest in all other assets owned by us and the guarantors, subject to customary exceptions. As required under the indentures governing our outstanding Senior Notes, we have granted equal and ratable liens in favor of the holders of the Senior Notes in all assets discussed above other than the accounts receivable of the Company and our subsidiaries.

Among other fees, we will pay a commitment fee (payable quarterly) based on the amount of unused commitments under the Revolving Facility (not including the uncommitted accordion feature discussed above). The commitment fee payable at March 31, 2006 was 0.375% of the unused commitment. We also pay fees with respect to any letters of credit issued under the Credit Facility. Letter of credit fees at March 31, 2006 were 1.25% of the currently issued and outstanding letters of credit.

The Credit Facility contains customary covenants, including but not limited to, restrictions on our ability, and in certain instances, our subsidiaries’ ability, to incur liens, merge or dissolve, make certain restricted payments, or sell or transfer assets. The Credit Facility also limits the Company’s and our subsidiaries’ ability to incur additional indebtedness. In addition, based upon the total amount advanced under the Term Loan Facility at March 31, 2006, we may not permit our consolidated total leverage ratio to exceed 4.00 to 1.00, nor permit our consolidated senior leverage ratio to exceed 3.00 to 1.00, nor permit our consolidated interest coverage ratio to be less than 4.50 to 1.0 during specified periods.

Upon the occurrence of certain events of default, our obligations under the Credit Facility may be accelerated and the lending commitments under the Credit Facility terminated. Such events of default include, but are not limited to, payment default to lenders, material inaccuracies of representations and warranties, covenant defaults, material payment defaults with respect to indebtedness or guaranty obligations, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA events, or change of control of the Company. As of the date of this filing, we were in compliance with the covenants of both our Credit Facility and our Senior Notes.

12. EQUITY

Our Board of Directors previously authorized three share repurchase programs totaling $1.75 billion of our Class A common stock. On September 2, 2003, we announced that our Board of Directors authorized a share repurchase program of up to $500 million of our Class A common stock; on April 29, 2004, we announced that our Board of Directors authorized a new, incremental share repurchase program of up to $750 million of our Class A common stock, and on October 20, 2005, we announced that our Board of Directors authorized an incremental share repurchase program of up to $500 million of our Class A common stock. These share repurchase plans were terminated on January 25, 2006 by our Board of Directors in contemplation of our Tender Offer, which was announced January 26, 2006 and expired March 17, 2006 (see Note 6). The programs, which were open-ended, allowed us to repurchase our shares on the open market from time to time in accordance with Securities and Exchange Commission (“SEC”) rules and regulations, including shares that could be purchased pursuant to SEC Rule 10b5-1. The number of shares purchased and the timing of purchases was based on the level of cash and debt balances, general business conditions and other factors, including alternative investment opportunities, and purchases under these plans were funded from various sources, including, but not limited to, cash on hand, cash flow from operations, and borrowings under our Prior Facility (as defined in Note 11). As of March 31, 2006, we had repurchased approximately 22.1 million shares at a total cost of approximately $1.1 billion and reissued 0.9 million shares for proceeds totaling $46.5 million to fund contributions to our employee stock purchase plan and 401(k) plan.

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

13. COMPREHENSIVE INCOME

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

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
Net income		$	77,876			$	114,666			$	275,196			$	304,968
Other comprehensive income (loss):
Foreign currency translation adjustment			(2,703	)			(1,150	)			(6,314	)			3,461
Amortization of unrealized loss on hedging instruments (net of income tax of $0.2 million and $0.7 million, respectively)			397				—				1,192				—
Unrealized gains and losses on foreign exchange forward agreements (net of income tax of $(0.1) million and $0, respectively)			(228	)			—				49				—
Comprehensive income		$	75,342			$	113,516			$	270,123			$	308,429

The unrealized loss on hedging instruments relates to interest rate hedges, which were settled in June 2005. The agreements were designated as cash flow hedges of forecasted interest payments in anticipation of the issuance of our Senior Notes. The settlement of the forward interest rate agreements of $19 million ($12 million, net of income tax) is reflected in accumulated other comprehensive loss, and will 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. During the three and nine months ended March 31, 2006, we amortized approximately $0.6 million and $1.9 million, respectively, to interest expense.

The following table represents the components of accumulated other comprehensive loss at March 31, 2006 and June 30, 2005 (in thousands):

		As of				As of
		March 31, 2006				June 30, 2005
Foreign currency gains (losses)		$	(5,435	)		$	879
Unrealized loss on hedging instruments, net			(10,597	)			(11,789	)
Unrealized gains on foreign exchange forward agreements, net			49				—
Total		$	(15,983	)		$	(10,910	)

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

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We hedge the variability of a portion of our anticipated future Mexican peso cash flows through foreign exchange forward agreements. The agreements are designated as cash flow hedges of forecasted payments related to certain operating costs of our Mexican operations. As of March 31, 2006, the notional amount of these agreements totaled 186 million pesos ($16.8 million) and expire at various dates over the next 12 months. Upon termination of these agreements, we will purchase Mexican pesos at the exchange rates specified in the forward agreements to be used for payments on our forecasted Mexican peso operating costs. As of March 31, 2006, the unrealized gain on these foreign exchange forward agreements, reflected in accumulated other comprehensive loss, was not material.

As part of the ASCOM acquisition, we acquired foreign exchange forward agreements related to our French operation’s Euro foreign exchange exposure related to their Canadian dollar and United States dollar revenues. These agreements do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As a result, we recorded a gain on hedging instruments of $0.7 million and $0.8 million for the three and nine months ended March 31, 2006 in other non-operating (income) expense, net in our Consolidated Statements of Income. As of March 31, 2006, the notional amount of these agreements totaled 36.4 million Canadian dollars and $4.5 million, and a liability was recorded for the related fair value of approximately ($4.7 million).

15. EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards 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								Nine Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
Numerator:
Income available to common stockholders		$	77,876			$	114,666			$	275,196			$	304,968
Denominator:
Weighted average shares outstanding (basic)			124,347				127,568				124,879				128,048
Effect of dilutive securities:
Stock options			1,972				2,661				1,927				3,033
Total potential common shares			1,972				2,661				1,927				3,033
Denominator for earnings per share assuming dilution			126,319				130,229				126,806				131,081
Earnings per share (basic)		$	0.63			$	0.90			$	2.20			$	2.38
Earnings per share assuming dilution		$	0.62			$	0.88			$	2.17			$	2.33

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 3,347,000, and 473,000 shares of common stock during the three months ended March 31, 2006 and 2005, respectively, and approximately 5,461,000 and 214,000 shares of common stock during the nine months ended March 31, 2006 and 2005, respectively, were outstanding during the three and nine months ended March 31, 2006 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price during the period.

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 SFAS 123(R).

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

16. SEGMENT INFORMATION

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

		Commercial				Government				Corporate				Consolidated
Three months ended March 31, 2006
Revenues(a)		$	790,278			$	524,177			$	—			$	1,314,455
Operating expenses (excluding depreciation and amortization and gain on sale of business) (b)			676,697				405,602				23,564				1,105,863
Gain on sale of business			—				(2,717	)			—				(2,717	)
Depreciation and amortization			49,340				23,196				355				72,891
Operating income		$	64,241			$	98,096			$	(23,919	)		$	138,418
Three months ended March 31, 2005
Revenues (a)		$	538,153			$	525,146			$	—			$	1,063,299
Operating expenses (excluding depreciation and amortization) (b)			422,330				403,655				13,701				839,686
Depreciation and amortization			35,850				21,503				448				57,801
Operating income		$	79,973			$	99,988			$	(14,149	)		$	165,812
Nine months ended March 31, 2006
Revenues (a)		$	2,341,050			$	1,631,909			$	—			$	3,972,959
Operating expenses (excluding depreciation and amortization and gain on sale of business) (b)			1,964,080				1,277,377				83,394				3,324,851
Gain on sale of business			—				(32,482	)			—				(32,482	)
Depreciation and amortization			141,970				68,283				1,162				211,415
Operating income		$	235,000			$	318,731			$	(84,556	)		$	469,175
Nine months ended March 31, 2005
Revenues (a)		$	1,517,559			$	1,619,208			$	—			$	3,136,767
Operating expenses (excluding depreciation and amortization) (b)			1,186,601				1,268,201				38,482				2,493,284
Depreciation and amortization			104,802				61,465				1,439				167,706
Operating income		$	226,156			$	289,542			$	(39,921	)		$	475,777

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

17. COMMITMENTS AND CONTINGENCIES

On March 3, 2006 we received notice from the Securities and Exchange Commission that it is conducting an informal investigation into certain stock option grants made by us from October 1998 through March 2005. We are responding to the SEC’s request for information and cooperating in the informal investigation. We were advised in the SEC’s notice of the investigation that the SEC’s request should not be construed as an indication by the SEC or its staff that any violations of law have occurred; and nor should the request be considered an adverse reflection upon any person, entity or security. At the direction of our Board of Directors, in response to the informal SEC investigation noted above, we have commenced an internal investigation through our regular outside counsel into our historical stock options practices from 1994 to the present under our stock option plans in effect during this period, including a review of our underlying option grant documentation and procedures. Our internal investigation is ongoing and not complete as of the date of this filing.

Notwithstanding the accounting determination described in Note 3, based on the initial findings of our internal investigation, we do not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price.

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

Another of our subsidiaries, ACS State & Local Solutions, Inc. (“ACS SLS”), and a teaming partner of this subsidiary, Tier Technologies, Inc. (“Tier”), received a grand jury document subpoena issued by the U.S. District Court for the Southern District of New York in May 2003. The subpoena was issued in connection with an inquiry being conducted by the Antitrust Division of the DOJ. We believe that the inquiry concerns the teaming arrangements between ACS SLS and Tier on child support payment processing contracts awarded to ACS SLS, and Tier as a subcontractor to ACS SLS, in New York, Illinois and Ohio but may also extend to the conduct of ACS SLS and Tier with respect to the bidding process for child support contracts in certain other states. Effective June 30, 2004, Tier was no longer a subcontractor to us in Ohio. Our revenue from the contracts for which Tier was a subcontractor was approximately $11.4 million and $10.9 million in the third quarter of fiscal years 2006 and 2005, respectively, and $33.9 million and $32.4 million in the first nine months of fiscal years 2006 and 2005, respectively, representing approximately 0.9% and 1% of our revenues for the third quarter of fiscal years 2006 and 2005, respectively, and 0.9% and 1% of our revenues for the first nine months of fiscal years 2006 and 2005, respectively. Our teaming arrangement with Tier also contemplated the California child support payment processing request for proposals, which was issued in late 2003; however, we did not enter into a teaming agreement with Tier for the California request for proposals. Based on Tier’s filings with the Securities and Exchange Commission, we understand that on November 20, 2003 the DOJ granted conditional amnesty to Tier in connection with this inquiry pursuant to the DOJ’s Corporate Leniency Policy. The policy provides that the DOJ will not bring any criminal charges against Tier as long as it continues to fully cooperate in the inquiry (and makes restitution payments if it is determined that parties were injured as a result of impermissible anticompetitive conduct). The DOJ is continuing its investigation, but we have no information as to when the DOJ will conclude this process. We have cooperated with the DOJ in producing documents in response to the subpoena, and our internal investigation and review of this matter through outside legal counsel will continue through the conclusion of the DOJ investigatory process. We are unable to express an opinion as to the likely outcome of this matter at this time.

On January 30, 2004, the Florida Agency for Workforce Innovation’s (“AWI”) Office of Inspector General (“OIG”) issued a report that reviewed 13 Florida workforce regions, including Dade and Monroe counties, and noted concerns related to the accuracy of customer case records maintained by our local staff. Our total revenue generated from the Florida workforce services amounts to approximately 0.9% of our revenues for the third quarter of fiscal year 2005, and 0.5% and 1% of our revenues for the first nine months of fiscal years 2006 and 2005, respectively. 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 is fully reflected in our results of operations for the first quarter of fiscal year 2005. We were also advised in February 2004 that the SEC 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 relates to a workforce contract in Pinellas County in Florida for the period from January 1999 to the contract’s expiration in March 2001, which was prior to our acquisition of this business from Lockheed Martin Corporation in August 2001. Further, we settled a civil lawsuit with Pinellas County in December 2003 with respect to claims related to the services rendered to Pinellas County by Lockheed Martin Corporation prior to our acquisition of ACS SLS (those claims having been transferred with ACS SLS as part of the acquisition), and the settlement resulted in Pinellas County paying ACS SLS an additional $600,000. We are continuing our internal investigation of these matters through outside legal counsel and we are 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. We anticipate that we may receive additional subpoenas for information in other Florida Workforce regions as a result of the AWI report issued in January 2004. During the second quarter of fiscal year 2006 we sold substantially all of our welfare-to-workforce services business (see Note 5). However, we retained the liabilities for this business which arose from activities prior to the date of closing, including the contingent liabilities discussed above.

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

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 March 31, 2006, outstanding surety bonds of $448.1 million and $93.3 million of our outstanding letters of credit secure our performance of contractual obligations with our clients. Surety bonds outstanding at March 31, 2006 include approximately $126.9 million related to Ascom’s contractual obligations. Approximately $20.7 million of letters of credit and $1.9 million of surety bonds 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 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.

During the nine months ended March 31, 2006, we purchased approximately $17.3 million of U.S. Treasury Notes in conjunction with a contract in our Government segment, and pledged them 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 Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and reflected in other assets in our Consolidated Balance Sheet at March 31, 2006.

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 nine months of fiscal year 2006, we made contingent consideration payments of $8.4 million related to acquisitions completed in prior years. As of March 31, 2006, the maximum aggregate amount of the outstanding contingent obligations to former shareholders of acquired entities is approximately $69.2 million. Upon satisfaction of the specified contractual criteria, such payments primarily result in a corresponding increase in goodwill.

We have indemnified Lockheed Martin Corporation against certain specified claims from certain pre-sale litigation, investigations, government audits and other issues related to the sale of the majority of our Federal business to Lockheed Martin Corporation in fiscal year 2004. Our contractual maximum exposure under these indemnifications is $85 million; however, we believe the actual exposure to be significantly less. As of March 31, 2006, other accrued liabilities include a reserve for these claims in an amount we believe to be adequate at this time.

Our Education Services business, which is included in our Commercial segment, performs third party student loan servicing in the Federal Family Education Loan program (“FFEL”) on behalf of various financial institutions. We service these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by us to a third party. At March 31, 2006, we serviced a FFEL portfolio of approximately 2 million loans with an outstanding principal balance of approximately $27.5 billion. Some servicing agreements contain provisions that, under certain circumstances, require us to purchase the loans from the investor if the loan guaranty has been permanently terminated as a result of a loan default caused by our servicing error. If defaults caused by us are cured during an initial period, any obligation we may have to purchase these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and then we repackage the loans for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans and establish a reserve for potential losses, or default liability reserve, through a charge to the provision for loss on defaulted loans purchased. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of March 31, 2006, other accrued liabilities include reserves which we believe to be adequate.

In April 2004, we were awarded a contract by the North Carolina Department of Health and Human Services (“DHHS”) to replace and operate the North Carolina Medicaid Management Information System (“NCMMIS”). Prior to DHHS’ award of the contract, our proposal was reviewed and approved by the State of North Carolina’s Information Technology Services group and the Federal Center for Medicare and Medicaid Services. Two competitors protested the contract award. In considering the protests, DHHS again reviewed our proposal and determined that our technical solutions did, in fact, comply with all technical requirements and denied the protests on June 3, 2004. EDS protested the denial. On January 12, 2005, an administrative law judge made a non-binding recommendation to sustain EDS’ protest of the contract between us and DHHS. Notwithstanding the reviews, approvals, and decisions in awarding the contract and in considering the protests, the administrative law judge based his recommendation on his assessment that our technical solution did not fully comply with DHHS technical standards for proposals. The non-binding recommendation was issued to the North Carolina State Chief Information Officer (“CIO”), Office of Technology Services. We, DHHS and EDS each presented written arguments to the CIO. A hearing was held before the CIO on March 15, 2005 during which each of the parties presented oral arguments. On April 28, 2005, the CIO issued a decision in favor of the DHHS and us as to the issues of: (i) the sufficiency of our technical solution, (ii) our satisfaction of RFP requirements relative to our integrated testing facility, and (iii) whether the State’s evaluation was consistent with the RFP’s evaluation criteria. However, his ruling also found insufficient evidence or argument had been submitted to address three other issues raised by EDS in its initial protest filing. Therefore, the CIO directed that a hearing be conducted on the issues of whether (a) our proposal complied with RFP requirements relative to experience of proposed key personnel; (b) our proposal complied with RFP requirements for pricing; and (c) any perceived

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

price advantage is illusory and in any event was miscalculated by DHHS. EDS subsequently waived its right to a hearing before the CIO on these three remaining issues and on May 18, 2005, EDS appealed the CIO’s decision to Wake County Superior Court. By Order entered on January 5, 2006, the Superior Court Judge of Wake County entered an Order affirming the Final Agency Decision and denying EDS’ claims. On February 3, 2006, EDS appealed the Superior Court’s January 5, 2006 Order to the North Carolina Court of Appeals. We intend to vigorously pursue affirmation of the Superior Court’s Order. DHHS has instructed us to continue performance of our services under the contract.

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

18. DEPARTURE OF OUR FORMER CHIEF EXECUTIVE OFFICER

On September 29, 2005, Jeffrey A. Rich submitted his resignation as a director and as our Chief Executive Officer. In recognition of Mr. Rich’s long and successful service to us and our stockholders as well as our accomplishments under his leadership, on September 30, 2005 we entered into an Agreement with Mr. Rich, which, among other things, provided the following: (i) Mr. Rich will remain on our payroll and be paid his current base salary (of $820,000 annually) through June 30, 2006; (ii) Mr. Rich will not be eligible to participate in our performance-based incentive compensation program in fiscal year 2006; (iii) we purchased from Mr. Rich all options previously granted to Mr. Rich that were vested as of the date of the Agreement in exchange for an aggregate cash payment, less applicable income and payroll taxes, equal to the amount determined by subtracting the exercise price of each such vested option from $54.08 per share and all such vested options were terminated and cancelled; (iv) all options previously granted to Mr. Rich that were unvested as of the date of the Agreement were terminated (such options had an in-the-money value of approximately $4.6 million based on the closing price of our stock on the New York Stock Exchange on September 29, 2005); (v) Mr. Rich received a lump sum cash payment of $4,100,000; (vi) Mr. Rich will continue to receive executive benefits for health, dental and vision through September 30, 2007; (vii) Mr. Rich will also receive limited administrative assistance through September 30, 2006; and (viii) in the event Mr. Rich establishes an M&A advisory firm by January 1, 2007, we will retain such firm for a two year period from its formation for $250,000 per year plus a negotiated success fee for completed transactions. The Agreement also contains certain standard restrictions, including restrictions on soliciting our employees for a period of three years and soliciting our customers or competing with us for a period of two years. We have been notified by Mr. Rich that he has established an M&A advisory firm and are currently negotiating an agreement for services from his firm.

In the first quarter of fiscal year 2006, we accrued $5.4 million ($3.4 million, net of income taxes) of compensation expense (recorded in wages and benefits in our Consolidated Statements of Income) related to this Agreement. In addition, the purchase of Mr. Rich’s unexercised vested stock options for approximately $18.4 million ($11.7 million, net of income taxes) was recorded as a reduction of additional paid-in capital. We made payments of approximately $23.3 million related to this Agreement in the first nine months of fiscal year 2006.

19. NEW ACCOUNTING PRONOUNCEMENTS

On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. Financial Accounting Standards Board Staff Position 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” allows companies additional time beyond that provided in Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” to determine the impact of the Act on its financial statements and provides guidance for the disclosure of the impact of the Act on the financial statements. Although this incentive is available to us until June 30, 2006, we have determined that we will not repatriate any amounts prior to the expiration of this provision, and accordingly, we have not recognized any income tax expense related to this repatriation provision.

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

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

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

GENERAL

We are a Fortune 500 and S&P 500 company with more than 55,000 people providing business process and information technology outsourcing solutions to commercial and government clients. Our clients have time-critical, transaction-intensive business and information processing needs, and we typically service these needs through long-term contracts.

New Business
During the quarter ended March 31, 2006, we signed contracts with new clients and incremental business with existing clients representing approximately $190.5 million of annualized recurring revenue and approximately $857 million in estimated total contract value. Based on annual recurring revenues, the Commercial segment contributed 81% of the new business signings and the Government segment contributed 19% of the new business signings.

There are no third party standards or requirements governing the calculation of new business signings or total contract value. We define new business signings as recurring revenue from new contracts, including the incremental portion of renewals, signed during the period and represent the estimated first twelve months of revenue to be recorded under that contract after full implementation. We define total contract value as the estimated total revenues from contracts signed during the period and represents estimated total revenue over the term of the contract. We use both new business signings and estimated total contract value as additional measures of estimating total revenue represented by contractual commitments, both to forecast prospective revenues and to estimate capital commitments. Revenues for both new business signings and estimated total contract value are measured under GAAP.

Review of Stock Option Grant Procedures
As previously announced, we received a letter dated March 1, 2006 from the Securities and Exchange Commission (the “SEC”) informing us that the SEC had begun an informal investigation into stock option grants made by us from October 1998 through March 2005. We are cooperating with the SEC in connection with its investigation.

At the direction of our Board of Directors, in response to the informal SEC investigation noted above, we have commenced an internal investigation through our regular outside counsel into our historical stock option practices from 1994 to the present under our stock option plans in effect during this period, including a review of our underlying option grant documentation and procedures. Our internal investigation is ongoing and not complete as of the date of this filing.

As explained more fully below, during our entire history as a public company, our regular and special compensation committees have generally utilized unanimous written consents signed by all members of the applicable committee ratifying their prior verbal approvals of option grants to senior executives or options to be granted in connection with significant acquisitions. We believe the prior verbal approvals of the committee members generally occurred contemporaneously with the legal effective date specified in the unanimous written consent of the committee members. Our legal counsel has advised us that our written consent process with deemed effective dates is valid under Delaware corporate law and our stock option plans. However, we have determined, in consultation with our independent registered public accounting firm, that although the option grants are legally valid and enforceable as of the effective date set forth in the unanimous consents, the proper measurement date, for accounting purposes only, may differ from the legal effective date.

Historically, we have granted stock options principally utilizing a process whereby our compensation committee or special compensation committee, as applicable, would approve stock option grants through unanimous written consents with specified effective dates that generally preceded the date on which the consents had been executed by all members of the applicable compensation committee. In connection with option grants to senior executives, the historical practice was for our chairman, who during periods prior to September 2003 was also a member of our compensation committee, to engage, on a generally contemporaneous basis with the effective date specified in the written consent, in individual telephonic discussions with each of the members of the applicable compensation committee, during which the committee member would indicate his approval of the option grants in question. In connection with significant acquisitions, our historical practice was for the Board of Directors (including members of the applicable compensation committee) to consider during board meetings convened for the purpose of approving an acquisition the proposed stock option component that would be designated to an acquisition target’s management team, with a unanimous written consent of the applicable compensation committee to follow at a later time with a specified effective date for the option grants in question.

Based on our option grant procedures, we have historically considered the effective date specified in the written consents by the applicable compensation committee as the accounting measurement date for determining stock-based compensation expense under APB 25 and SFAS 123(R). However, we have determined, in consultation with our independent registered public accounting firm, that the proper accounting measurement date for stock option awards cannot precede the date on which the grants were approved through the execution of written consents or through a valid meeting of the applicable compensation committee. Notwithstanding our accounting determination noted above, we believe that (i) our historical written consent effective date process is permitted under our current and predecessor stock option plans and Delaware corporate law, (ii) we have consistently followed this process in prior accounting periods, and (iii) the grants in question had been verbally discussed and approved by each of the members of the applicable compensation committee generally on a contemporaneous basis with the specified effective date of those grants.

Accordingly, based on the preliminary results of our review of our historical stock option practices, including our underlying option grant documentation and procedures, and the initial findings of our internal investigation (which is ongoing and not complete as of the date of this filing), we have determined that the estimated cumulative pretax stock-based compensation charge resulting from revised measurement dates is approximately $32 million ($21 million, net of income tax) at June 30, 2005. Based on this preliminary estimate, had this estimated compensation charge been reflected, as and when incurred, in our results of operations in prior years, the impact on net income for fiscal years ended June 30, 2001, 2002, 2003, 2004 and 2005 would have been a reduction of 1.9%, 1.6%, 1.5%, 0.7%, and 0.7%, respectively. The potential impact of this estimated compensation charge for the fiscal years ended June 30, 2006 and beyond is estimated to be immaterial based on currently available information. There would be no impact on revenue or net cash provided by operating activities as a result of the estimated compensation charge. This estimated stock-based compensation charge relates to certain of the option grants covering approximately 23 million common shares (after giving effect to forfeitures of option grants covering approximately 7 million common shares) issued by us subsequent to our initial public offering in 1994 and through June 30, 2005. During this same period, we recorded a cumulative pretax profit of approximately $3.2 billion ($2.0 billion, net of income tax).

Our internal investigation is ongoing and not complete as of the date of this filing, therefore, should additional information become available, our preliminary estimate of stock-based compensation could change. Accordingly, once our internal investigation is completed, we will conclude as to whether the cumulative stock-based compensation charge will be recorded in our fourth quarter of fiscal year 2006 or will result in a restatement of prior period financial statements. Based on the current estimate of the stock-based compensation charge, we do not believe that restatement of prior period financial information will be required.

In conjunction with this investigation, we are also evaluating whether any previously deducted compensation related to exercised stock options may be non-deductible under Section 162(m) of the Internal Revenue Code. In that event, we may be required to pay additional taxes and interest associated with previous compensation deductions in connection with such exercised stock options and we may lose additional deductions in future periods. We currently estimate that the amount of any lost tax deductions claimed on previously filed income tax returns will not be material to our consolidated results of operations or financial position, although we have not finalized our assessment of this matter.

Notwithstanding the above-referenced accounting determination, based on the initial findings of our internal investigation (which is ongoing and not complete as of the date of this filing), we do not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price.

Stock-based Compensation
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. We adopted SFAS 123(R) on a prospective basis beginning July 1, 2005 for stock-based compensation awards granted after that date and for unvested awards outstanding at that date using the modified prospective application method. Prior to July 1, 2005, we followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) in accounting for our stock-based compensation plans.

The adoption of SFAS 123(R) in the first quarter of fiscal year 2006 resulted in prospective changes in our accounting for stock-based compensation awards, including recording stock-based compensation expense and the related deferred income tax benefit on a prospective basis and reflecting the excess tax benefits from the exercise of stock-based compensation awards in cash flows from financing activities.

The adoption of SFAS 123(R) resulted in the recognition of compensation expense of $8 million and $25.4 million ($5.1 million and $16.7 million, net of deferred income tax benefits), or $0.04 and $0.13 per diluted share, in wages and benefits in the Consolidated Statements of Income for the three and nine months ended March 31, 2006, respectively. In accordance with the modified prospective application method of SFAS 123(R), prior period amounts have not been restated to reflect the recognition of stock-based compensation costs. The total compensation cost related to non-vested awards not yet recognized at March 31, 2006 was approximately $83.3 million, which is expected to be recognized over a weighted average of 3.31 years.

In periods ending prior to July 1, 2005, the income tax benefits from the exercise of stock options were classified as net cash provided by operating activities pursuant to Emerging Issues Task Force (“EITF”) Issue No. 00-15 “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” However, for periods ending after July 1, 2005, pursuant to SFAS 123(R), the income tax benefits exceeding the recorded deferred income tax benefit and any pre-adoption “as-if” deferred income tax benefit from stock- based compensation awards (the excess tax benefits) are required to be reported in net cash provided by financing activities. For the nine months ended March 31, 2006, excess tax benefits from stock-based compensation awards of $17.3 million were reflected as an outflow in cash flows from operating activities and an inflow in cash flows from financing activities in the Consolidated Statements of Cash Flows, resulting in a net impact of zero on cash. In the prior year period, income tax benefits from the exercise of stock options of $20.6 million were reflected as an inflow in cash flows from operating activities in the Consolidated Statements of Cash Flows.

As discussed in Note 2 to our consolidated financial statements, on February 2, 2005, our Board of Directors approved an amendment to stock options previously granted that did not become exercisable until five years from the date of grant to provide that such options become exercisable when they vest. It is expected that future option grants will contain matching vesting and exercise schedules which we believe will result in a lower expected term.

Acquisitions
In December 2005, we completed the acquisition of the Transport Revenue division of Ascom AG (“Ascom”), a Switzerland based communications company. Ascom consists of three business units — fare collection, airport parking solutions and toll collection with office locations across nine countries. The transaction was valued at approximately $100.5 million plus related transaction costs and was funded from borrowings under our Prior Facility. The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value as of the date of acquisition. We acquired assets of $234.1 million and assumed liabilities of $133.6 million. We recorded goodwill of $70.7 million, approximately 31% of which is deductible for income tax purposes, and intangible assets of $1.3 million. The $1.3 million of intangible assets is attributable to customer relationships, non-compete agreements and patents with weighted average useful lives of approximately 8 years. We believe this acquisition launches us into the international transportation services industry and will expand our portfolio in the transit and parking payment markets and adds toll collection customers to our existing customer base. The operating results of the acquired business are included in our financial statements in the Government segment from the effective date of the acquisition, December 1, 2005.

In July 2005, we completed the acquisition of LiveBridge, Inc. (“LiveBridge”), a customer care service provider primarily serving the financial and telecommunications industries. The transaction was valued at approximately $32 million plus a working capital adjustment of $2.5 million, excluding contingent consideration of up to $32 million based upon future financial performance and was funded from cash on hand and borrowings under our Prior Facility. The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value as of the date of acquisition. We acquired assets of $42 million and assumed liabilities of $7.5 million. We recorded goodwill of $11.5 million, 49% of which is deductible for income tax purposes, and intangible assets of $12.9 million. The $12.9 million of intangible assets is attributable to customer relationships and non-compete agreements with weighted average useful lives of approximately 6 years. We believe this acquisition will expand our customer care service offerings in the finance and telecommunications industries and will extend our global capabilities and operations by adding the LiveBridge operational centers in Canada, India and Argentina. The operating results of the acquired business are included in our financial statements in the Commercial segment from the effective date of the acquisition, July 1, 2005.

We completed one small acquisition in our Government segment in the third quarter of fiscal year 2006.

These acquisitions are not considered material to our results of operations, either individually or in the aggregate; therefore, no pro forma information is presented.

Sale of Government welfare- to-workforce services business
In December 2005, we completed the divestiture of substantially all of our Government welfare-to-workforce services business to Arbor E&T, LLC (“Arbor”), a wholly owned subsidiary of ResCare, Inc., for approximately $69 million, less transaction costs. The proceeds were collected in the third quarter of fiscal year 2006. The Government welfare-to-workforce services business is no longer strategic or core to our operating philosophy. This divestiture allows us to focus on our technology-enabled business process outsourcing and information technology outsourcing service offerings. Assets sold were approximately $29.1 million and liabilities assumed by Arbor were approximately $0.2 million, both of which were included in the Government segment. We retained the net

working capital related to the welfare-to-workforce services business. We recognized a pretax gain of $29.8 million ($17.9 million, net of income tax) in the second quarter of fiscal year 2006 and $2.7 million ($1.6 million, net of income tax) in the third quarter of fiscal year 2006, upon the assignment of certain customer contracts during the quarter. Approximately $3.5 million of the consideration relates to certain customer contracts whose assignment to Arbor was not complete as of March 31, 2006, and is reflected as deferred proceeds in other accrued liabilities in our Consolidated Balance Sheet as of March 31, 2006. We expect to complete the transfer of these remaining contracts to Arbor by the end of fiscal year 2006 upon receipt of customer consents. The after tax proceeds from the divestiture were generally used for general corporate purposes.

In the second quarter of fiscal year 2006, we recorded a provision for estimated litigation settlement related to the welfare-to-workforce services business. In connection with the transfer of the contracts and ongoing customer relationships to Arbor and due to a change in our estimate of collectibility of the retained outstanding receivables, we recorded a provision for uncollectible accounts receivable related to the welfare-to-workforce services business. Total provisions recorded were $3.3 million ($2.1 million, net of income tax).

Revenues from the divested business were $2.9 million and $51.3 million for the three months ended March 31, 2006 and 2005, respectively, and $104 million and $164.6 million for the nine months ended March 31, 2006 and 2005, respectively. Operating income from the divested business, excluding the gain on sale, was $0.1 million and $5.3 million for the three months ended March 31, 2006 and 2005, respectively, and $6.4 million and $16.2 million for the nine months ended March 31, 2006 and 2005, respectively.

Restructuring and other activities
During the second quarter of fiscal year 2006, and in connection with our new executive leadership, 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 initiated certain restructuring initiatives and activities that are expected to enhance our competitive position in certain markets, and recorded certain restructuring charges and asset impairments arising from our discretionary decisions. We estimate a total of 2,100 employees will be 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 will be migrated to lower cost markets. As of March 31, 2006, approximately 900 employees had been involuntarily terminated. We anticipate the costs savings related to these involuntary terminations will be approximately $29 million of wages and benefits per year beginning in fiscal year 2007; however, some of the cost savings from these involuntary terminations will be reinvested in subject matter experts, project management talent and sales personnel as we look to further promote those lines of businesses that reflect the most potential for growth. We expect that our assessment activities will be two-thirds complete by the end of the fourth quarter of fiscal year 2006, which may result in further restructuring and related charges, the amount and timing of which cannot be determined at this time.

In our Commercial segment, we began an assessment of the cost structure of our global production model, particularly our offshore processing activities. We identified offshore locations in which our labor costs are no longer competitive or where the volume of work processed by the site no longer justifies retaining the location, including one of our Mexican facilities. In connection with this assessment, we recorded a restructuring charge for involuntary termination of employees related to the closure of those duplicative facilities of $1.6 million and $6.0 million for the three and nine months ended March 31, 2006, respectively, which is reflected in wages and benefits in our Consolidated Statements of Income, and $1.4 million and $1.7 million for the three and nine months ended March 31, 2006, respectively, for impairments of duplicative technology equipment and facility costs, facility shutdown and other costs, which are reflected as part of total operating expenses in our Consolidated Statements of Income. We expect these activities will consolidate our global production activities and enhance our competitive position.

In our Government segment, we began an assessment of our competitive position, evaluated our market strategies and the technology used to support certain of our service offerings. We began to implement operating practices that we utilize in our Commercial segment, including leveraging our proprietary workflow technology and implementing activity-based-compensation, which is expected to reduce our operating costs and enhance our competitive position. In connection with these activities, we recorded a restructuring charge for involuntary termination of employees of $0.7 million and $1 million for the three and nine months ended March 31, 2006, which is reflected in wages and benefits in our Consolidated Statements of Income, $0.3 million and $1.7 million for the three and nine months ended March 31, 2006 for asset impairment and other charges, principally for duplicative software as a result of recent acquisition activity, and is reflected in total operating expenses in our Consolidated Statements of Income. As discussed earlier, we completed the sale of substantially all of our welfare-to-workforce services business, which allows us to focus on our technology-enabled business process outsourcing and information technology outsourcing service offerings.

In our Corporate segment, we determined that the costs related to the ownership of a corporate aircraft outweighed the benefits to the Company. We recorded an asset impairment charge of $4.4 million in the nine months ended March 31, 2006 related to the corporate aircraft, which is reflected in other operating expenses in our Consolidated Statements of Income, in connection with its classification as held for sale. In March 2006, we entered into a letter of intent to sell the corporate aircraft for approximately $4 million, less transaction costs. We expect the transaction to be completed during the fourth quarter of fiscal year 2006.

The following table summarizes activity for the accrual for involuntary termination of employees for the three and nine ended March 31, 2006 (in thousands):

Balance at December 31, 2005		$	2,783
Accrual recorded			2,348
Payments			(1,860	)
Balance at March 31, 2006		$	3,271
Balance at June 30, 2005		$	—
Accrual recorded			7,019
Payments			(3,748	)
Balance at March 31, 2006		$	3,271

The March 31, 2006 accrual for involuntary termination of employees is expected to be paid in the fourth quarter of fiscal year 2006 from cash flows from operating activities.

As part of our acquisition of the human resources consulting and outsourcing business of Mellon Financial Corporation (the “Acquired HR Business”) in the fourth quarter of fiscal year 2005, we recorded $22.3 million in involuntary employee termination costs for employees of the Acquired HR Business in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” During the first nine months of fiscal year 2006, $11.7 million in involuntary employee termination payments have been made and charged against accrued compensation. As of March 31, 2006, the balance of the related accrual was $8.7 million and is expected to be paid by the end of the first quarter of fiscal year 2007 from cash flows from operating activities.

Tender Offer
On January 26, 2006, we announced that our Board of Directors authorized a modified “Dutch Auction” tender offer to purchase up to 55.5 million shares of our Class A common stock at a price per share not less than $56 and not greater than $63 (the “Tender Offer”). The Tender Offer commenced on February 9, 2006, and expired on March 17, 2006 (as extended), and was funded with proceeds from the Term Loan Facility (defined below). Our directors and executive officers, including our Chairman, Darwin Deason, did not tender shares pursuant to the Tender Offer. The number of shares purchased in the Tender Offer was 7,365,110 shares of Class A common stock at an average price of $63 per share plus transaction costs, for an aggregate purchase amount of $475.9 million. As of March 31, 2006, 3,371 of the shares purchased in the Tender Offer were retired and the remaining shares purchased in the Tender Offer, with an aggregate purchase amount of $475.7 million (including transaction costs), were reported in treasury stock as of March 31, 2006 and retired in April 2006.

Voting Rights of Our Chairman
Prior to the Tender Offer, Darwin Deason, our Chairman of our Board of Directors, held approximately 36.7% of the total outstanding voting power of the Company through his ownership of Class A shares (which have one vote per share) and Class B shares (which have ten votes per share). Mr. Deason did not tender any of the Class A shares held by him in connection with the Tender Offer. As a result of the Tender Offer, Mr. Deason’s voting power increased from 36.7% to approximately 38.2% of the total outstanding voting power of the Company.

However, Mr. Deason entered into a Voting Agreement with the Company dated February 9, 2006 (the “Voting Agreement”) in which he agreed to limit his ability to cause the additional voting power he would hold as a result of the Tender Offer to affect the outcome of any matter submitted to the vote of the shareholders of the Company after consummation of the Tender Offer. Mr. Deason agreed that to the extent his voting power immediately after the Tender Offer increased above the percentage amount of his voting power immediately prior to the Tender Offer (such increase is approximately 1.5%), Mr. Deason would cause the shares representing such additional voting power (the “Excess Voting Power”) to appear, not appear, vote or not vote at any meeting or pursuant to any consent solicitation in the same manner, and in proportion to, the votes or actions of all shareholders including Mr. Deason whose Class A and Class B shares shall, solely for the purpose of proportionality, be counted on a one for one vote basis (even though the Class B shares have ten votes per share).

The Voting Agreement will have no effect on shares representing the approximately 36.7% voting power of the Company held by Mr. Deason prior to the Tender Offer, which Mr. Deason will continue to have the right to vote in his sole discretion. The Voting Agreement also does not apply to any Class A shares that Mr. Deason may acquire after the Tender Offer through his exercise of stock options, open market purchases or in any future transaction that we may undertake. Other than as expressly set forth in the Voting Agreement, Mr. Deason continues to have the power to exercise all rights attached to the shares he owns, including the right to dispose of his shares and the right to receive any distributions thereon.

The Voting Agreement will terminate on the earliest of (i) the mutual agreement of the Company (authorized by not less than a majority of the vote of the then independent and disinterested directors) and Mr. Deason, (ii) the date on which Mr. Deason ceases to hold any Excess Voting Power, as calculated in the Voting Agreement, or (iii) the date on which all Class B shares are converted into Class A shares.

A special committee of the Board of Directors, consisting of our four independent directors, will engage in good faith discussions with Mr. Deason to reach agreement on fair compensation to be paid to Mr. Deason for entering into the Voting Agreement within six months following the closing of the Tender Offer. However, whether or not Mr. Deason and our special committee are able to reach agreement on compensation to be paid to Mr. Deason, the Voting Agreement will remain in effect.

This summary of the Voting Agreement is qualified in its entirety by the terms of the Voting Agreement, which is filed as an exhibit hereto.

Credit Agreement
On March 20, 2006, we entered into a Credit Agreement with Citicorp USA, Inc., as Administrative Agent (“Citicorp”), Citigroup Global Markets Inc., as Sole Lead Arranger and Book Runner, 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”). The Credit Facility provides for a senior secured term loan facility of $800 million, with the ability to increase it by up to $3 billion, under certain circumstances (the “Term Loan Facility”) and a senior secured revolving credit facility of $1 billion with the ability to increase it by up to $750 million (the “Revolving Facility”), each of which is described more fully below. At the closing of the Credit Facility, we and certain of our subsidiaries jointly borrowed approximately $800 million under the Term Loan Facility and approximately $93 million under the Revolving Facility. We used the proceeds of the Term Loan Facility to (i) refinance approximately $278 million in outstanding indebtedness under our 5-Year Competitive Advance and Revolving Credit Facility Agreement dated as of October 27, 2004 (the “Prior Facility”), (ii) finance the purchase of shares of our Class A common stock tendered in the Company’s “Dutch Auction” tender which expired March 17, 2006 (as extended) and (iii) for the payment of transaction costs, fees and expenses related to the Credit Facility and Dutch Auction. As a result of the refinancing of the Prior Facility, we wrote off approximately $4.1 million in debt issue costs, which was included in other non-operating (income) expense, net. A portion of the proceeds of the Revolving Facility were used to refinance approximately $73 million in outstanding indebtedness under the Prior Facility. The remainder of the proceeds of the Revolving Facility will be used for working capital purposes. In addition, approximately $114 million of letters of credit were issued under the Credit Facility to replace letters of credit outstanding under the Prior Facility. The Prior Facility was terminated on March 20, 2006.

Amounts borrowed under the Term Loan Facility mature on March 20, 2013, and will amortize in quarterly installments in an aggregate annual amount equal to 1% of the aggregate principal amount of the loans advanced, with the balance payable on the final maturity date. Interest on the outstanding balances under the Term Loan Facility is payable, at our option, at a rate equal to the Applicable Margin (as defined in the Credit Facility) plus the fluctuating Base Rate (as defined in the Credit Facility), or at the Applicable Margin plus the current LIBOR (as defined in the Credit Facility). The borrowing rate on the Term Loan Facility at March 31, 2006 was 6.28%.

Proceeds borrowed under the Revolving Facility will be used as needed for general corporate purposes. Amounts under the Revolving Facility are available on a revolving basis until the maturity date of March 20, 2012. The Revolving Facility allows for borrowings up to the full amount of the revolver in either U.S. Dollars or Euros. Up to the U.S. dollar equivalent of $200 million may be borrowed in other currencies, including Sterling, Canadian Dollars, Australian Dollars, Yen, Francs, Drones and New Zealand Dollars. Portions of the Revolving Facility are available for issuances of up to the U.S. dollar equivalent of $700 million of letters of credit and for borrowings of up to the U.S. dollar equivalent of $150 million of swing loans. Interest on outstanding balances under the Revolving Facility is payable, at our option, at a rate equal to the Applicable Margin plus the fluctuating Base Rate, or at the Applicable Margin plus the current LIBOR for the applicable currency . The current interest rate payable under the Revolving Facility at March 31, 2006 ranges from 2.39% to 3.89%, depending upon the currency of the outstanding borrowings.

The Credit Facility includes an uncommitted accordion feature of up to $750 million in the aggregate allowing for future incremental borrowings under the Revolving Facility, which may be used for general corporate purposes. The Credit Facility also includes an additional uncommitted accordion feature of up to $3 billion allowing for future incremental borrowings under the Term Loan Facility which may be used to fund additional purchases of our equity securities or for extinguishment of our existing $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”).

Obligations under the Credit Facility are guaranteed by us and substantially all of our domestic subsidiaries and certain of our foreign subsidiaries (but only to the extent such guarantees would not result in materially adverse tax consequences). In addition, Credit Facility obligations are secured under certain pledge agreements by (i) a first priority perfected pledge of all notes owned by us and the guarantors and the capital stock of substantially all of our domestic subsidiaries and certain of our foreign subsidiaries (subject to certain exceptions, including to the extent the pledge would give rise to additional SEC reporting requirements for our subsidiaries or result in materially adverse tax consequences), and (ii) a first priority perfected security interest in all other assets owned by us and the guarantors, subject to customary exceptions. As required under the indentures governing our outstanding Senior Notes, we have granted equal and ratable liens in favor of the holders of the Senior Notes in all assets discussed above other than the accounts receivable of the Company and our subsidiaries.

Among other fees, we will pay a commitment fee (payable quarterly) based on the amount of unused commitments under the Revolving Facility (not including the uncommitted accordion feature discussed above). The commitment fee payable at March 31, 2006 was 0.375% of the unused commitment. We also pay fees with respect to any letters of credit issued under the Credit Facility. Letter of credit fees at March 31, 2006 were 1.25% of the currently issued and outstanding letters of credit.

The Credit Facility contains customary covenants, including but not limited to, restrictions on our ability, and in certain instances, our subsidiaries’ ability, to incur liens, merge or dissolve, make certain restricted payments, or sell or transfer assets. The Credit Facility also limits the Company’s and our subsidiaries’ ability to incur additional indebtedness. In addition, based upon the total amount advanced under the Term Loan Facility at March 31, 2006, we may not permit our consolidated total leverage ratio to exceed 4.00 to 1.00, nor permit our consolidated senior leverage ratio to exceed 3.00 to 1.00, nor permit our consolidated interest coverage ratio to be less than 4.50 to 1.0 during specified periods.

Upon the occurrence of certain events of default, our obligations under the Credit Facility may be accelerated and the lending commitments under the Credit Facility terminated. Such events of default include, but are not limited to, payment default to lenders, material inaccuracies of representations and warranties, covenant defaults, material payment defaults with respect to indebtedness or guaranty obligations, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA events, or change of control of the Company. As of the date of this filing, we were in compliance with the covenants of both our Credit Facility and our Senior Notes.

Derivative instruments and hedging activities
We hedge the variability of a portion of our anticipated future Mexican peso cash flows through foreign exchange forward agreements. The agreements are designated as cash flow hedges of forecasted payments related to certain operating costs of our Mexican operations. As of March 31, 2006, the notional amount of these agreements totaled 186 million pesos ($16.8 million) and will expire at various dates over the next 12 months. Upon termination of these agreements, we will purchase Mexican pesos at the exchange rates specified in the forward agreements to be used for payments on our forecasted Mexican peso operating costs. As of March 31, 2006, the unrealized gain on these foreign exchange forward agreements, reflected in accumulated other comprehensive loss, was not material.

As part of the ASCOM acquisition, we acquired foreign exchange forward agreements related to our French operation’s Euro foreign exchange exposure related to their Canadian dollar and United States dollar revenues. These agreements do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As a result, we recorded a gain on hedging instruments of $0.7 million and $0.8 million for the three and nine months ended March 31, 2006 in other non-operating (income) expense, net in our Consolidated Statements of Income. As of March 31, 2006, the notional amount of these agreements totaled 36.4 million Canadian dollars and $4.5 million, and a liability was recorded for the related fair value of approximately ($4.7 million).

Departure of our former Chief Executive Officer
On September 29, 2005, Jeffrey A. Rich submitted his resignation as a director and as our Chief Executive Officer. In recognition of Mr. Rich’s long and successful service to us and our stockholders as well as our accomplishments under his leadership, on September 30, 2005 we entered into an Agreement with Mr. Rich, which, among other things, provided the following: (i) Mr. Rich will remain on our payroll and be paid his current base salary (of $820,000 annually) through June 30, 2006; (ii) Mr. Rich will not be eligible to participate in our performance-based incentive compensation program in fiscal year 2006; (iii) we purchased from Mr. Rich all options previously granted to Mr. Rich that were vested as of the date of the Agreement in exchange for an aggregate cash payment, less applicable income and payroll taxes, equal to the amount determined by subtracting the exercise price of each such vested option from $54.08 per share and all such vested options were terminated and cancelled; (iv) all options previously granted to Mr. Rich that were unvested as of the date of the Agreement were terminated (such options had an in-the-money value of approximately $4.6 million based on the closing price of our stock on the New York Stock Exchange on September 29, 2005); (v) Mr. Rich received a lump sum cash payment of $4,100,000; (vi) Mr. Rich will continue to receive executive benefits for health, dental and vision through September 30, 2007; (vii) Mr. Rich will also receive limited administrative assistance through September 30, 2006; and (viii) in the event Mr. Rich establishes an M&A advisory firm by January 1, 2007, we will retain such firm for a two year period from its formation for $250,000 per year plus a negotiated success fee for completed transactions. The Agreement also contains certain standard restrictions, including restrictions on soliciting our employees for a period of three years and soliciting our customers or competing with us for a period of two years. We have been notified by Mr. Rich that he has established an M&A advisory firm and are currently negotiating an agreement for services from his firm.

In the first quarter of fiscal year 2005, we accrued $5.4 million ($3.4 million, net of income taxes) of compensation expense (recorded in wages and benefits in our Consolidated Statements of Income) related to this Agreement. In addition, the purchase of Mr. Rich’s unexercised vested stock options for approximately $18.4 million ($11.7 million, net of income taxes) was recorded as a reduction of additional paid-in capital. We made payments of approximately $23.3 million related to this Agreement in the first nine months of fiscal year 2006.

Government Healthcare Contract
In April 2004, we were awarded a contract by the North Carolina Department of Health and Human Services (“DHHS”) to replace and operate the North Carolina Medicaid Management Information System (“NCMMIS”). Prior to DHHS’ award of the contract, our proposal was reviewed and approved by the State of North Carolina’s Information Technology Services group and the Federal Center for Medicare and Medicaid Services. Two competitors protested the contract award. In considering the protests, DHHS again reviewed our proposal and determined that our technical solutions did, in fact, comply with all technical requirements and denied the protests on June 3, 2004. EDS protested the denial. On January 12, 2005, an administrative law judge made a non-binding recommendation to sustain EDS’ protest of the contract between us and DHHS. Notwithstanding the reviews, approvals, and decisions in awarding the contract and in considering the protests, the administrative law judge based his recommendation on his assessment that our technical solution did not fully comply with DHHS technical standards for proposals. The non-binding recommendation was issued to the North Carolina State Chief Information Officer (“CIO”), Office of Technology Services. We, DHHS and EDS each presented written arguments to the CIO. A hearing was held before the CIO on March 15, 2005 during which each of the parties presented oral arguments. On April 28, 2005, the CIO issued a decision in favor of the DHHS and us as to the issues of: (i) the sufficiency of our technical solution, (ii) our satisfaction of RFP requirements relative to our integrated testing facility, and (iii) whether the State’s evaluation was consistent with the RFP’s evaluation criteria. However, his ruling also found insufficient evidence or argument had been submitted to address three other issues raised by EDS in its initial protest filing. Therefore, the CIO directed that a hearing be conducted on the issues of whether (a) our proposal complied with RFP requirements relative to experience of proposed key personnel; (b) our proposal complied with RFP requirements for pricing; and (c) any perceived price advantage is illusory and in any event was miscalculated by DHHS. EDS subsequently waived its right to a hearing before the CIO on these three remaining issues and on May 18, 2005, EDS appealed the CIO’s decision to Wake County Superior Court. By Order entered on January 5, 2006, the Superior Court Judge of Wake County entered an Order affirming the Final Agency Decision and denying EDS’ claims. On February 3, 2006, EDS appealed the Superior Court’s January 5, 2006 Order to the North Carolina Court of Appeals. We intend to vigorously pursue affirmation of the Superior Court’s Order. DHHS has instructed us to continue performance of our services under the contract.

REVENUE GROWTH

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. 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 March 31,																Nine months ended March 31,
		2006				2005				$ Growth				Growth %				2006				2005				$ Growth				Growth %
Consolidated
Total Revenues		$	1,314,455			$	1,063,299			$	251,156				24	%		$	3,972,959			$	3,136,767			$	836,192				27	%
Less: Divestitures			(2,907	)			(51,290	)			48,383								(104,276	)			(165,121	)			60,845
Adjusted		$	1,311,548			$	1,012,009			$	299,539				30	%		$	3,868,683			$	2,971,646			$	897,037				30	%
Acquired revenues		$	256,855			$	17,475			$	239,380				24	%		$	710,755			$	21,830			$	688,925				23	%
Internal revenues			1,054,693				994,534				60,159				6	%			3,157,928				2,949,816				208,112				7	%
Total		$	1,311,548			$	1,012,009			$	299,539				30	%		$	3,868,683			$	2,971,646			$	897,037				30	%
Commercial
Total Revenues		$	790,278			$	538,153			$	252,125				47	%		$	2,341,050			$	1,517,559			$	823,491				54	%
Less: Divestitures			—				—				—								—				—				—
Adjusted		$	790,278			$	538,153			$	252,125				47	%		$	2,341,050			$	1,517,559			$	823,491				54	%
Acquired revenues		$	210,855			$	17,475			$	193,380				36	%		$	645,065			$	21,642			$	623,423				41	%
Internal revenues			579,423				520,678				58,745				11	%			1,695,985				1,495,917				200,068				13	%
Total		$	790,278			$	538,153			$	252,125				47	%		$	2,341,050			$	1,517,559			$	823,491				54	%
Government
Total Revenues		$	524,177			$	525,146			$	(969	)			—			$	1,631,909			$	1,619,208			$	12,701				1	%
Less: Divestitures			(2,907	)			(51,290	)			48,383								(104,276	)			(165,121	)			60,845
Adjusted		$	521,270			$	473,856			$	47,414				10	%		$	1,527,633			$	1,454,087			$	73,546				5	%
Acquired revenues		$	46,000			$	—			$	46,000				10	%		$	65,690			$	188			$	65,502				4	%
Internal revenues			475,270				473,856				1,414				—				1,461,943				1,453,899				8,044				1	%
Total		$	521,270			$	473,856			$	47,414				10	%		$	1,527,633			$	1,454,087			$	73,546				5	%

RESULTS OF OPERATIONS

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

		Three months ended								Nine months ended
		March 31,								March 31,
		2006				2005				2006				2005
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues:
Wages and benefits			49.0				42.6				47.9				42.1
Services and supplies			20.8				23.7				21.9				24.8
Rent, lease and maintenance			11.9				11.7				12.0				11.6
Depreciation and amortization			5.5				5.4				5.3				5.3
Other			1.5				0.4				0.8				0.5
Cost of revenues			88.7				83.8				87.9				84.3
Gain on sale of business			(0.2	)			—				(0.8	)			—
Other operating expenses			1.0				0.6				1.1				0.5
Total operating expenses			89.5				84.4				88.2				84.8
Operating income			10.5				15.6				11.8				15.2
Interest expense			1.1				0.3				1.0				0.3
Other non-operating (income) expense, net			0.1				—				(0.1	)			—
Pretax profit			9.3				15.3				10.9				14.9
Income tax expense			3.4				4.5				4.0				5.2
Net income			5.9	%			10.8	%			6.9	%			9.7	%