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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements the past 90 days.

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

     As of September 16, 2002, 125,499,389 shares of Class A common stock were outstanding. The aggregate market value of the Class A common voting stock held by nonaffiliates of Affiliated Computer Services, Inc. as of such date, approximated $5,667,702,000.

DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for 2002 Annual Meeting - Part III.

Table of Contents

AFFILIATED COMPUTER SERVICES, INC.

FORM 10-K
June 30, 2002

Table of Contents

PART I

Item 1. Business

General

We are a global, Fortune 1000 company delivering comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to commercial clients, state and local government clients, and federal government clients. We are based in Dallas, Texas and have offices primarily in North America, as well as Central America, Europe, Africa, and the Middle East. Our clients have time-critical, transaction-intensive business and information processing needs, and we typically service these needs through long-term contracts. Approximately 90%, 89% and 88% of our revenues for fiscal years 2002, 2001 and 2000, respectively, were recurring, which are revenues derived from services that our clients use each year in connection with their ongoing businesses.

Our services enable businesses to focus on core operations, respond to rapidly changing technologies and reduce expenses associated with business processes and information processing. Our business strategy is to expand our client base and enhance our service offerings through both internal marketing and the acquisition of complementary companies. Our marketing efforts focus on developing long-term relationships with clients that choose to outsource mission critical business processes and information technology requirements. Our business expansion has been accomplished both from internal growth as well as through acquisition. Since inception through June 30, 2002, we have completed several acquisitions, which have resulted in geographic expansion, growth and diversification of our client base, expansion of services and products offered, and increased economies of scale. Our revenues have increased from $534 million in fiscal year 1995 to approximately $3.1 billion in fiscal year 2002, a compound annual growth rate of 28%. Of this growth, approximately 42% resulted from internal growth and 58% resulted from growth through acquisitions.

We serve three primary markets, which include state and local governments, commercial clients, and the federal government. We are a leading provider of business process outsourcing and information technology services to state and local governments. During fiscal year 2002, revenues from our state and local government segment accounted for approximately $1.24 billion, or 41% of our revenues. Of this $1.24 billion, approximately 58% is derived from services provided to local municipalities, approximately 25% is derived from state healthcare programs, and the remainder is derived from services provided to states, primarily child support payment processing. We provide technology-based services with a focus on transaction processing and program management services such as child support payment processing, electronic toll collection, welfare to workforce services, and traffic violations processing. We also design, develop, implement, and operate large-scale health and human services programs and the information technology solutions that support those programs.

Our commercial sector accounted for approximately $1.01 billion, or 33% of our fiscal year 2002 revenues. We provide business process outsourcing, technology outsourcing, and systems integration services to our commercial sector clients. These services are provided to a variety of clients nationwide, including healthcare providers, retailers, wholesale distributors, manufacturers, utilities, financial institutions, insurance and transportation companies. Our business process outsourcing services include claims processing, finance and accounting, loan processing and document processing. Our technology outsourcing services include mainframe, midrange, desktop, network, and web-hosting solutions. Our commercial systems integration services include application development and implementation, applications outsourcing, technical support and training, as well as network design and installation services.

We also serve the federal government market, which during fiscal year 2002 accounted for approximately $811 million, or 26% of our annual revenues. Our services in this market are comprised of business process outsourcing services, which consist primarily of loan processing services and human resources services, and systems integration services, which include application development and outsourcing, network implementation and maintenance, desktop services, technical staff augmentation, and training under long-term contracts. Approximately 55% of revenues within our federal government business are derived from civilian agencies with the remaining 45% from Department of Defense agencies.

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Market Overview

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

	•		the desire of organizations to focus on their core competencies;
	•		the increasing desire by organizations to drive process improvements and improve the speed of and reduce the cost of execution;
	•		the desire by organizations to have a workforce that is able to expand and contract in relation to their business volumes;
	•		the increasing acceptance by organizations to utilize offshore resources for business process outsourcing;
	•		the increasing complexity of information technology systems and the need to connect electronically with clients, suppliers, and other external and internal systems;
	•		the increasing requirements for rapid processing of information and the instantaneous communication of large amounts of data to multiple locations; and
	•		the desire by organizations to take advantage of the latest advances in technology without the cost and resource commitment required to maintain in-house systems.

Business Strategy

The key components of our business strategy include the following:

	•		Expand Client Base — We seek to develop long-term relationships with new clients by leveraging our subject matter expertise, world-wide data manufacturing capabilities and infrastructure of information technology products and services. Our primary focus is to increase our revenues by obtaining new clients with recurring requirements for business process and information technology services.
	•		Expand Existing Client Relationships – We seek to expand existing client relationships by increasing the scope and breadth of services we provide.
	•		Build Recurring Revenues - We seek to enter into long-term relationships with clients to provide services that meet their ongoing business requirements while supporting their mission critical business process or information technology needs.
	•		Provide Flexible Solutions – We offer custom-tailored business process and information technology solutions using a variety of proprietary and third-party licensed software on multiple hardware and systems software platforms and domestic and international workforces that are able to expand and contract in relation to clients’ business volumes.
	•		Invest in Technology – We respond to technological advances and the rapid changes in the requirements of our clients by committing substantial amounts of our resources to the operation of multiple hardware platforms, the customization of products and services that incorporate new technology on a timely basis and the continuous training of our personnel.
	•		Maximize Economies of Scale - Our strategy is to develop and maintain a significant client and account/transaction base to create sufficient economies of scale that enable us to achieve competitive costs.

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	•		Complete Strategic and Tactical Acquisitions - Our acquisition strategy is to acquire companies to expand the products and services we offer to existing clients, to obtain a presence in new, complementary markets and to expand our geographic presence.
	•		Attract, Train and Retain Employees — We believe that attracting, training, and retaining high quality employees are essential to our growth. We seek to hire motivated individuals with strong character and leadership traits and provide them with ongoing technological and leadership skills training. We emphasize retaining our employees with challenging work assignments and incentive programs.

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

State and Local Governments

We are a leading provider of business process outsourcing services to state and local governments. Our services help state and local agencies reduce operating costs, increase revenue streams and increase the quality of services to citizens. Approximately 41% of our fiscal 2002 revenues were derived from contracts with state and local governments and their agencies. State and local governments may terminate most of these contracts at any time, without cause, for convenience or lack of funding. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we improperly charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government.

Pricing for our services in the state and local market is generally determined based on the number of transactions processed, human services cases managed or, in instances where a systems development project is required in our state healthcare unit, we price our services on a fixed fee basis for the development work. We currently focus on six primary services and our acquisition of Lockheed Martin IMS Corporation (“IMS”) in fiscal year 2002 significantly expanded our business process outsourcing offerings.

State Healthcare

We design, develop, implement, and operate large-scale health and human services programs and the information technology solutions that support those programs. Today, we operate 13 state Medicaid programs and five state Child Health Insurance Programs that cover approximately 6.5 million recipients, process over 250 million Medicaid healthcare claims annually and disburse over $17 billion in provider payments. We also operate 16 state pharmacy benefits management programs that assist states in controlling prescription drug costs, pharmacy intervention and surveillance and the processing of drug claims. We operate 11 state decision support systems that assist states with data collection, fraud and abuse detection and case management. We also assist states in bringing their health programs into compliance with the Health Insurance Portability and Accountability Act (HIPAA).

Children and Family Services

We are a major provider of child support and payment processing with high volume remittance processing and service center operations that handle 44% of the nation’s payment transactions. We also provide “locate and

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collection” services to find delinquent parents and collect past due child support and other payments. Within the Children and Family Services area we provide electronic benefits transfer, which is the issuance of food stamps and cash benefits through magnetic stripe cards with redemption through point of sale device (POS) and automated teller machines (ATM).

Welfare and Workforce Services

We provide management, operations and systems service offerings to local Workforce Development Boards and Coalitions, thereby creating a government-mandated, integrated One-Stop system linking job seekers and job providers. Through the operation of approximately 100 One-Stop centers across the country, we use technology innovations and re-engineered service delivery models to provide job-related service to assist low-income families in securing and retaining employment and help employers find and retain potential employees.

Transportation Systems and Services

We focus on three areas within our Transportation Systems and Services: Electronic Toll Collection, Motor Vehicle Services and Commercial Vehicle Operations. Within Electronic Toll Collection we offer toll agencies a complete array of services including the operation of the back-office customer service center as well as lane installation and integration. We currently operate the largest electronic toll collection program in the world, E-Z Pass New York. Within Motor Vehicle Services, we assist states in the processing of fuel tax and registration revenues. We process more than 25% of state-issued operating credentials and support the operations of more than 30% of the motor carriers operating in the United States. Within Commercial Vehicle Operations we offer a nationwide network that electronically checks safety credentials and weighs trucks at highway speed, granting participating truckers authorization to bypass open weigh stations and ports-of-entry without stopping.

Municipal Services

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

Information Technology Outsourcing

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

Commercial

Within the commercial sector, which comprises 33% of our fiscal year 2002 revenues, we provide our clients with business process outsourcing, technology outsourcing and systems integration services.

Business Process Outsourcing

Business process outsourcing is defined as the delegation of one or more information technology intensive business processes to an external provider who owns and manages the selected processes based on measurable performance metrics. Clients outsource business processes to gain efficiencies, increase productivity and lower costs. More and more companies are concluding that it is more efficient to focus on their core competencies and to outsource their non-core but mission-critical business processes. We developed our business process outsourcing services to capitalize on a growing trend by business to outsource entire processes, including the technology requirements of the business function.

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Pricing for business process outsourcing services is typically determined on the basis of the number of accounts or transactions processed.

Our commercial business process outsourcing practice is focused in four major categories: claims processing, finance and accounting, loan processing, and document processing. We provide healthcare claims processing for many of the top healthcare payers in the United States. Within finance and accounting we provide revenue/invoicing accounting, disbursement processing, expense reporting, procurement, payroll, cash management, and other services associated with finance and accounting that are transaction-intensive. We handle loan processing services such as collections, account reconciliations and borrower correspondence for third-party student loan programs. We handle the processing and storage of documents for banks, mortgage companies and other corporations that desire electronic access and storage of their documents.

We receive client information in all media formats such as over the web, EDI, fax, voice, paper, microfilm, computer tape, optical disk, or CD ROM. Information is typically digitized upon receipt and sent through our proprietary workflow software, which is tailored to our clients’ process requirements. Utilizing satellite technology, we have developed expertise in transmitting data around the world to our international workforce. We have approximately 8,500 full-time equivalent employees in Mexico; Guatemala; Ghana, West Africa; Jamaica; the Dominican Republic, and Barcelona, Spain that support our commercial business process outsourcing services. A majority of our business process outsourcing workforce is compensated using performance-based metrics, and as a result, varies with our clients’ transaction volumes.

During fiscal year 2002, we acquired AFSA Data Corporation (“AFSA”) from FleetBoston Financial Corporation. AFSA had been performing loan servicing to the Department of Education’s Direct Student Loan program as our subcontractor since 1994. In addition, AFSA provides loan servicing to the third-party student loan market.

Technology Outsourcing

We offer a complete range of technology outsourcing solutions to commercial businesses desiring to improve the performance of their information technology organizations. Our technology outsourcing solutions include the delivery of information processing services on a remote basis from host data centers that provide processing capacity, network management and desktop support. Information processing services include mainframe, mid-range, desktop, network, and web-hosting solutions.

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

Our target market for technology outsourcing services consists of medium-to-large-sized commercial organizations with time-critical, transaction-intensive information processing needs. We typically provide our technology outsourcing services pursuant to multi-year contracts, which are normally priced on a resource utilization basis. Resources utilized include processing time, the number of desktops managed, professional services, data storage and retrieval utilization, and output media utilized.

Systems Integration Services

Our systems integration services include application development and implementation, applications outsourcing, technical support and training, as well as network design and installation services. Our systems integration services include the development of web-based applications and web-enablement of information technology assets, allowing our clients to conduct business with their customers and business partners via the Internet. We also provide systems integration services to clients who are deploying client/server architectures, advanced networks and outsourcing legacy applications maintenance. We believe our ability to deliver high-level skill sets and proven methodologies across a variety of technologies enhances our ability to help clients and prospects deal with technological change. Due to the

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nature of the work, we generally offer our systems integration services on a time and materials basis to a changing client base under short-term contractual arrangements.

Federal Government

Within the federal government sector, we provide business process outsourcing and systems integration services. Approximately 26% of our revenues are derived from contracts and subcontracts with federal government agencies. Our allowable federal government contract costs and fees are subject to audit by the Defense Contract Audit Agency (“DCAA”). These audits may result in non-reimbursement of some contract costs and fees. To date, we have experienced no material adjustments as a result of audits by the DCAA. The DCAA has completed audits of the Company’s federal contracts through fiscal year 1999 for a majority of the federal government contracts.

Business Process Outsourcing

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

Our largest contract for loan services is with the Department of Education, for which we service student loans under the Department of Education’s Direct Student Loan program administered by its Office of Federal Student Aid (“FSA”). Under this contract, we currently provide loan servicing to over 5.7 million borrowers, or over 16.2 million loans with an aggregate value of $78 billion. During fiscal year 2002, revenue from this contract was approximately $161 million, or 5% of consolidated revenues. This contract was scheduled to run through September 30, 2003. In November 2001, the Department extended the contract term through September 30, 2006, with an option for further extension through September 30, 2007. This contract extension was to ensure that the Department’s current program and systems modernization initiative remains on schedule and to minimize cost and disruption to the program. In December 2001, Sallie Mae challenged the Department’s sole-source extension in a protest filed with the Department. The FSA took the position that the Sallie Mae protest was without merit and that the contract extension was lawful. In July 2002, the Department’s deciding official sustained the protest, concluding that further market research was needed to support the sole-source extension of our contract. However, the deciding official declined to rescind our contract extension and directed the FSA to analyze its direct loan servicing needs and procure the services in compliance with law. The deciding official’s decision stated that the Department could make a sole-source award to ACS if legally and factually justified. We have been advised that the FSA intends to provide the appropriate support for the contract extension. In any case, we expect that the FSA will have broad discretion in how it chooses to comply with any further decisions in this matter and it could, among other things, elect to modify the contract extension term or conduct a competitive bid process. We believe we would be positioned very favorably in any competitive bid process as a result of our strong relationship with the Department. However, there can be no assurance that the contract extension granted in 2001 will be sustained or that we would be awarded an extension in any competitive bid process.

Systems Integration Services

We provide applications development, applications outsourcing, network implementation and maintenance, desktop services, technical staff support, and training under long-term contracts to the Department of Defense and civilian agencies, who generally either contract directly with us or through the General Services Administration for these services. The General Services Administration performs the procurement function for many civilian and Department of Defense agencies. Approximately 28% of these services for fiscal year 2002 were provided pursuant to twelve contracts with the General Services Administration. We also provide our services directly to a variety of civilian agencies such as the Departments of Labor, Treasury, Transportation and Energy, as well as NASA, FAA, the U.S. Postal Service, and the Federal Energy Regulatory Commission. In addition to the above services, we provide command and control, communications, computer and intelligence, surveillance, and reconnaissance (C⁴ and ISR) systems integration services to a variety of Department of Defense agencies such as Air Force Materiel Command, the U.S. Unified Commands, and the National Security Agency. We generally price these services on a time and materials basis.

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Revenues

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

Our systems integration services include application development and implementation, applications outsourcing, technical support and training, as well as network design and installation services. Technology outsourcing services include the delivery of information processing services on a remote basis from host data centers that provide customer application processing capacity and related services and network management.

Client Base

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

Approximately 90%, 89% and 88% of our revenues for fiscal years 2002, 2001 and 2000, respectively, were recurring. We define recurring revenues as revenues derived from services that are used by our clients each year in connection with their ongoing businesses, and accordingly, exclude conversion and deconversion fees, software license fees, short-term contract programming engagements, product installation fees, and hardware sales.

Our five largest clients accounted for approximately 14%, 18% and 18% of our fiscal years 2002, 2001 and 2000 revenues, respectively. Our largest client represents 5% of our consolidated revenues. In addition, over 99% of our consolidated revenues are derived from domestic clients.

Competition

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

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

We believe we compete successfully in the commercial market by offering technology outsourcing services that leverage our data center infrastructure, value added business process outsourcing services which leverage our technical skills,

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proprietary workflow software, offshore workforce, and economies of scale. The competition for our commercial technology outsourcing services include EDS, Computer Sciences Corp. (CSC), IBM, CGI, Perot Systems, Siemens, and in-house departments performing the function we are seeking to outsource. We may be required to purchase technology assets from prospective clients or to provide financial assistance to prospective clients in order to obtain their contracts. Many of our competitors have substantially greater resources and thus, may have a greater ability to obtain client contracts where sizable asset purchases or investments are required. To maintain competitive prices, we operate with efficient and low overhead and maintain a significant client base and account/transaction base to achieve sufficient economies of scale. The competition for our commercial business process outsourcing services is EDS and Accenture, as well as clients’ in-house departments currently performing the function that they are seeking to outsource. Other niche competitors for commercial business process outsourcing services include Exult, Sourcecorp, Inc., and Sallie Mae.

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

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

Sales and Marketing

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

Employees

We believe that our success depends on our continuing ability to attract and retain skilled technical, marketing and management personnel. As of June 30, 2002, we had approximately 36,200 full-time equivalent employees, including approximately 27,600 employed domestically, with the balance employed in our international operations. Of the domestic employees, approximately 300 are represented by a union. Approximately 1,700 of our international full-time equivalent employees are represented by unions, primarily in Mexico. We have had no work stoppages or strikes by our employees. Management considers its relations with employees and union officials to be good.

As of June 30, 2002, approximately 19,700 full-time equivalent employees provide business process, technology outsourcing and systems integration services to our commercial clients, approximately 10,700 full-time equivalent employees provide business process outsourcing services to our state and local government clients and approximately 5,800 full-time equivalent employees provide business process outsourcing and systems integration services to our federal government clients. Approximately 1,900 of our employees have federal government security clearances.

Item 2. Properties

As of June 30, 2002, we have approximately 379 locations in the United States and 17 locations in nine other countries. Approximately 1.2 million square feet is owned and approximately 4.4 million square feet is leased. In addition, our employees are in numerous client locations where we neither own nor lease the occupied space. The leases expire from calendar years 2002 to 2018 and we do not anticipate any significant difficulty in obtaining lease renewals or alternate

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space. Our executive offices are located in Dallas, Texas at a company-owned facility of approximately 630,000 square feet, which also houses a host data center and other operations. We believe that our current facilities are suitable and adequate for our business.

Item 3. Legal Proceedings

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

On August 29, 2002, the Fourteenth Court of Appeals, Houston, Texas, reversed the trial court’s judgment and remanded the case to the trial court for further proceedings. However, the court of appeals affirmed the trial court judgment in part as to one of the plaintiffs. The court of appeals also held that the trial court did not err in dismissing certain of our affirmative defenses at a pretrial conference. We intend to file a motion for rehearing with the court of appeals in September 2002, and, if necessary, to file an appeal with the Texas Supreme Court. We expect the plaintiffs to file such motions and appeals as well. We continue to believe that we have a meritorious defense to all or a substantial portion of the plaintiffs’ claims, and accordingly, have not accrued any amount on our balance sheet related to the lawsuit. We would be subject to a material charge if the Texas Supreme Court upon appeal were to reverse the decision of the court of appeals and affirm the trial court judgment.

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

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

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PART II

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

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

On September 16, 2002, the last reported sales price of our Class A common stock as reported on the New York Stock Exchange was $46.22 per share.

Except for the cash dividends paid by ACS Government Solutions Group, Inc. prior to its becoming part of our company by a December 1997 merger, we have not paid any cash dividends to date on our common stock. We intend to continue to retain earnings for use in the operation of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Under the terms of our unsecured revolving credit agreement we are prohibited from paying cash dividends in any fiscal year in a total amount that would exceed 50% of our net income for the preceding fiscal year. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and such other factors as the Board of Directors deems relevant.

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Item 6. Selected Consolidated Financial Data

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

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

Forward-looking Statements

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

General

We derive our revenues from delivering comprehensive business process outsourcing and information technology outsourcing solutions as well as system integration services to commercial, state and local, and federal government clients. A substantial portion of our revenues is derived from recurring monthly charges to our customers under service contracts with initial terms that vary from one to ten years. For the fiscal year ended June 30, 2002, approximately 90% of our revenues were recurring. We define recurring revenues as revenues derived from services that are used by our clients each year in connection with their ongoing businesses, and accordingly, exclude conversion and deconversion fees, software license fees, short-term contract programming engagements, product installation fees, and hardware sales. Since the inception of our company, we have purchased several information technology services and business process outsourcing companies, resulting in geographic expansion, growth and diversification of our client base, expansion of services offered, and increased economies of scale. Approximately 58% of the increase in our revenues since fiscal year 1995 is attributable to these acquisitions.

Significant Developments — Fiscal Year 2002

During fiscal 2002, we signed significant new contracts with new clients and incremental business with existing clients representing $554 million of annual recurring new revenue. We acquired eight companies in fiscal year 2002, two of which serve our state and local segment, four of which serve our commercial segment, one of which serves our federal segment, and AFSA, which serves all three segments. All share and per share information is presented giving effect to the two-for-one stock split of our Class A and Class B common shares that occurred February 22, 2002.

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

In August 2001, we acquired the business process outsourcing services unit of National Processing Company (“NPC”). NPC provides healthcare claims processing, credit card application processing, and airline lift ticket processing. As part of the transaction, we acquired all of NPC’s offshore operations in Jamaica, the Dominican Republic, Barbados and a majority of NPC’s Mexican operations. The transaction value was $43 million plus

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related transaction costs. NPC’s operating results are included in our financial statements from the effective date of the acquisition, August 1, 2001.

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

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

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

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

In the third quarter of fiscal 2002, we recorded a $7.4 million write-down in other non-operating expense, associated with a write-down of a cost-basis investment to its estimated realizable value. Included in tax expense in the third quarter of fiscal 2002 is a one-time tax benefit of approximately $4.3 million resulting primarily from recently enacted federal income tax rules that provide for a larger tax deduction associated with our June 2000 divestitures and deferred tax adjustments to reflect realization of tax deductions for which their probability is no longer uncertain.

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

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

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Significant Developments — Fiscal Year 2001

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

During the first quarter of fiscal year 2001, we recorded a $12.8 million gain in other non-operating income related to the sale of a non-strategic minority investment in ACS Merchant Services, Inc. Also during the quarter, we recorded a $10.4 million charge in connection with the termination of certain hardware leases and disaster recovery contracts (reflected in rent, lease and maintenance expense) and a $2.1 million charge for non-recurring litigation costs and the write-down of property held-for-sale (reflected in other operating expense).

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

Significant Developments — Fiscal Year 2000

During fiscal year 2000, we signed new contracts with new clients and incremental business with existing clients of $232 million of annual recurring revenue. During fiscal year 2000, we acquired three companies, two serving our commercial segment and one serving the federal government segment. All of these acquisition transactions expanded our existing market expertise.

In the second quarter of fiscal 2000, we recorded a $3.0 million pretax charge in connection with the consolidation of certain business process outsourcing operations. These expenses include approximately $2.6 million related to duplicate software and production facilities (reflected in rent, lease and maintenance expense), $0.2 million of unamortized leasehold improvements and write-offs of excess equipment (reflected in depreciation and amortization expense), and $0.2 million for severance payments for reductions in staff (reflected in wages and benefits expense).

In May 2000, we entered into a formal plan to divest certain non-strategic units consisting primarily of our ATM processing business and our commercial staffing business. These business units, which were no longer considered strategic to our long-term goal of providing information technology and business process outsourcing services, along with other smaller divested business units, accounted for approximately 15% of our fiscal year 2000 revenues. In June 2000, we sold the ATM processing business for cash proceeds of approximately $179.8 million. The proceeds from this transaction were received in July 2000. In June 2000, we also completed the sale of two small professional services and systems integration businesses resulting in cash proceeds of approximately $0.8 million. As a result of these divestiture transactions, we recorded a net pretax gain of $85.8 million during the fourth quarter of fiscal year 2000. The cash proceeds from these divestitures were used to pay down amounts outstanding under our existing credit facility.

During the fourth quarter of fiscal year 2000, we initiated a formal plan to divest the commercial staffing business and two other smaller business units. As a result, we recorded a $43.9 million pretax impairment charge for goodwill associated with the commercial staffing business, and the net assets were reclassified into the balance sheet caption “Net Assets Held for Sale.” Subsequently, the sale of these units was completed in the first quarter of fiscal year 2001 with proceeds of approximately $47.0 million. We recorded other non-recurring pretax charges of approximately $23.7 million related to the impairment of certain other intangibles, primarily customer relationship, charges associated with loss contracts, a contractual dispute with a client, non-recurring litigation, and severance. At June 30, 2000, we recorded a $4.4 million pretax impairment charge for software and other intangibles associated with two other smaller businesses.

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Results of Operations

The following table sets forth certain items from our Consolidated Statements of Income expressed as a percentage of revenues and includes the non-recurring charges mentioned previously in “Significant Developments”:

Comparison of Fiscal 2002 to Fiscal 2001

Revenues
Revenues increased $1.0 billion, or 48%, to $3.1 billion from $2.1 billion in fiscal years 2002 and 2001, respectively. Internal growth for fiscal year 2002 was 14%, and growth from acquisitions was 34%. Revenues in our state and local government segment increased $891.6 million to $1.2 billion in fiscal 2002 from $351.2 million in fiscal 2001. Internal revenue growth was 64% due primarily to increased revenue in new and existing contracts in Georgia, Mississippi, and Florida, and increased revenues from transportation systems and services and welfare and workforce services contracts. Acquisition growth is primarily due to the IMS acquisition in early fiscal 2002 (see Significant Developments – Fiscal 2002). Excluding revenues from units whose divestitures were completed in fiscal year 2001 of $37.3 million (see Significant Developments – Fiscal 2001), revenues in our commercial segment increased $81.4 million, or approximately 9% with 8% from acquisitions and 1% from internal growth. Acquisition growth in our commercial segment was related to the AFSA, Andersen and NPC acquisitions in fiscal 2002 (see Significant Developments – 2002). Revenues in our federal government segment increased $63.7 million, or approximately 9%, primarily due to internal growth related to increases in new and existing defense and desktop services contracts as well as the Department of Education.

Operating expenses
As a percentage of revenue, operating expenses decreased 0.5% to 86.9% in fiscal year 2002 from 87.4% in fiscal year 2001. Operating expenses increased $822.5 million to $2.7 billion in fiscal year 2002. Excluding the effect of non-recurring charges of $12.5 million (see Significant Developments – Fiscal 2001) and the application of SFAS 142 (see New Accounting Standards), operating expenses increased $859.5 million, or 48%, to $2.7 billion in fiscal 2002.

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

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

Rent, lease and maintenance expense increased $54.9 million to $278.6 million in fiscal 2002. Excluding the effect of non-recurring charges (see Significant Developments – Fiscal 2001), rent, lease and maintenance increased $65.3 million. As a percentage of revenue, rent, lease and maintenance decreased 1.2% due to increased revenue from BPO services in our revenue mix which has a lower component of rent, lease and maintenance.

After adjusting for the application of SFAS 142, depreciation and amortization increased $41.3 million or 0.2% as a percentage of revenue due to increased amortization of intangible assets. Goodwill amortization was $24.5 million, or 1.2% of revenue, in 2001. No goodwill amortization was recorded in fiscal year 2002 (see New Accounting Standards).

Other operating expenses increased $15.6 million to $34.6 million in fiscal 2002. Excluding the effect of non-recurring charges (see Significant Developments – Fiscal 2001), other operating expenses increased $17.7 million, or 105%. As a percentage of revenue other operating expenses increased 0.3% due to increased marketing efforts and legal expenses in fiscal year 2002.

Operating Margins
Excluding the effect of non-recurring charges of $12.5 million (see Significant Developments – Fiscal 2001) and the application of SFAS 142, our operating margins increased 0.5% to 13.1% in fiscal year 2002 due to the items discussed above.

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

Other non-operating (income) expense
Other non-operating expense in fiscal 2002 includes a $7.4 million write-down of a cost basis investment, a $2.3 million loss on the sale of business unit, and a $1.0 million loss on a long-term investment we received in the December 1998 acquisition of BRC Holdings, Inc. Other non-operating income in fiscal 2001 consisted of a non-recurring gain on sale of an investment (see Significant Developments – Fiscal 2001) and a gain on a note receivable. Excluding these items, other non-operating income decreased $5.1 million due to a decrease in interest income as a result of the use of excess cash held at June 30, 2001 to fund in part the IMS acquisition in early fiscal 2002.

Tax Expense
Tax expense in fiscal year 2002 includes a one-time tax benefit of $4.3 million (see Significant Developments – Fiscal 2002). Excluding this benefit, our effective tax rate of approximately 37.5% exceeded the federal statutory rate of 35% due primarily to the net effect of state income taxes. Our effective tax rate decreased 1.75% from 39.25% in fiscal 2001 due to the application of SFAS 142.

Comparison of Fiscal 2001 to Fiscal 2000

Revenues
Revenues for fiscal year 2001 were $2.1 billion, compared to approximately $2.0 billion in fiscal year 2000. Excluding revenues from divested units of $37.3 million and $313.3 million in fiscal years 2001 and 2000, respectively, revenues increased $377.1 million, or 23%, from $1.65 billion to $2.03 billion. Internal growth for fiscal year 2001 was 14%, and the remainder was related to acquisitions. Revenues in our commercial segment, excluding the fiscal year 2000 divestitures, rose 17%, or $135.9 million, primarily due to growth from new and existing business process outsourcing and technology outsourcing contracts. Revenue in our state and local government segment increased $111.3 million, or 46%, primarily due to new contracts in state Medicaid and welfare benefit program management. Revenues from our federal segment increased $129.8 million, or 21%, due to the full year impact of the acquisition of Intellisource in the fourth quarter of fiscal year 2000 and growth in our Department of Education contract.

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Operating Expenses
Total operating expenses for fiscal years 2001 and 2000 were $1.8 billion. Excluding the non-recurring charges of $12.5 million (see Significant Developments – Fiscal Year 2001) and $75.0 million (see Significant Developments – Fiscal Year 2000) in fiscal years 2001 and 2000, respectively, total operating expenses increased $63.2 million, or 3.6%, to $1.8 billion due to our growth in new business.

As a percentage of revenues, wages and benefits increased from 43.5% to 43.8% primarily as a result of the fiscal year 2000 divestitures, which had a smaller component of wages and benefits. In addition, the growth of our business process outsourcing services, which has a higher labor component, increased this percentage.

Services and supplies decreased as a percentage of revenues from 31.0% to 29.0% as a result of the divestiture of the ATM processing business, which had a large component of interchange fees paid to ATM distributors.

Rent, lease and maintenance expense was $224 million in fiscal year 2001 compared to $206 million in fiscal year 2000. However, excluding the non-recurring items in fiscal year 2001, rent, lease and maintenance remained relatively constant as a percentage of revenues at 10.3% and 10.5% in fiscal years 2001 and 2000, respectively.

Other operating expenses decreased to $19.1 million in fiscal year 2001 compared to $28.9 million in fiscal year 2000. However, excluding non-recurring items, other operating expenses decreased from 1.1% to 0.8% as a percentage of revenues due to legal and other expenses recorded in June 2000.

Operating Margins
Excluding the effect of non-recurring charges (see Significant Developments – Fiscal Year 2001 and 2000), our operating margins increased to 11.5% in fiscal year 2001 from 10.1% in fiscal year 2000 due to the divestiture of the ATM processing business, which had lower operating margins than technology outsourcing and business process outsourcing services. Goodwill amortization expense for fiscal years 2001 and 2000 is included in the calculation of operating expense and operating margins.

Interest Expense
Interest expense remained constant at approximately $24 million, or 1.2% of revenue, in fiscal years 2001 and 2000.

Other Non-operating (Income) Expense, net
In fiscal year 2001, other non-operating income, net includes a non-recurring gain of $12.8 million related to the sale of an investment (see Significant Developments – Fiscal Year 2001). Net gain from divestitures represents an $85.8 million gain in fiscal year 2000 as a result of the divestiture program completed in early fiscal year 2001 (see Significant Developments – Fiscal Year 2000).

Tax Expense
Our effective tax rate of approximately 39.25% in fiscal year 2001 exceeded the federal statutory rate of 35% due primarily to the amortization of certain acquisition-related costs that are non-deductible for tax purposes, plus the net effect of state income taxes.

Liquidity and Capital Resources

We finance our business through cash flows from operations and the issuance of debt and equity. One of our primary financial goals is to maintain an adequate level of liquidity through active management of assets and liabilities.

During the twelve months ended June 30, 2002, we generated approximately $372 million in cash flow from operations versus the fiscal year 2001 amount of approximately $142 million. Free cash flow, defined as cash provided (used) by operating activities less property, equipment and purchased software additions, was approximately $228 million for fiscal year 2002 versus approximately $43 million for fiscal year 2001. Fiscal year 2001 cash flow from operations was adversely impacted by the payments of approximately $50 million in income taxes related to the net gain from our divestiture activity in June 2000 and approximately $10 million of non-recurring lease termination charges. After adjusting for these items, cash flow from operations and free cash flow

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increased 84% and 121%, respectively. During fiscal year 2002 versus fiscal year 2001, our operating cash flow was enhanced by current year net income that increased from $134 million in fiscal year 2001 to $230 million in fiscal year 2002, a 71% increase.

During the fiscal year 2002, we used $1.6 billion in investing activities. Investing activities included the purchase of property, equipment and software, net, which increased from approximately $99 million in fiscal year 2001 to approximately $144 million in fiscal year 2002. Our capital expenditures remain at less than 5% of total revenues, which we believe is adequate to support our growing business and to meet contractual requirements. We expended over $1.4 billion in cash for acquisitions, primarily for IMS and NPC in August 2001 (approximately $825 million and $43 million, respectively, plus related transaction costs), Andersen in May 2002 (approximately $65 million plus related transaction costs), and AFSA in June 2002 (approximately $410 million plus related transaction costs).

During fiscal year 2002, approximately $1.0 billion was provided by financing activities. We financed the IMS acquisition through a combination of a $550 million 18-month interim credit facility, available cash on hand, and borrowings under our existing credit facility. This interim credit facility was repaid in October 2001 with proceeds from an equity offering of 18.4 million shares of our Class A common stock at $40.50 per share, that raised $714.3 million, net of transaction costs. We used borrowings under our existing credit facility to purchase NPC and existing cash on hand to purchase Andersen. We secured interim financing in the amount of $375 million for the AFSA acquisition that was supplemented by our revolving credit facility and cash on hand. In September 2002, we entered into a new three and one-half year $875 million credit facility on terms generally similar to our existing credit facility, which was partially used to refinance the AFSA interim facility.

On March 15, 2002, all the outstanding 4% Notes ($229.9 million) were converted to Class A common stock. As the result of such conversions, 10.8 million shares of our Class A common stock were issued to shareholders. This relieved the Company of approximately $2.7 million in interest expense for fiscal year 2002 related to the 4% Notes. In the third quarter of fiscal year 2001, we completed the issuance of $317 million of our 3.5% Notes, which allowed us to repay borrowings from our existing credit facility and to fund current and future acquisitions.

At June 30, 2002, we had $266 million of availability under our $450 million revolving credit facility, after giving effect to outstanding letters of credit of $169 million that secure certain contractual performance and other obligations. These letters of credit reduce the availability of our revolving credit facility. We had $15 million outstanding on our credit facility, which is reflected in long-term debt.

At June 30, 2002, we had cash and cash equivalents totaling $33.8 million compared to $242.5 million at June 30, 2001. The decrease is primarily due to the use of cash for the IMS acquisition and other acquisitions. Included in the cash balances at June 30, 2002 and 2001, are $5.4 million and $4.9 million, respectively, of restricted cash held on behalf of government clients.

Working capital decreased to $388.6 million at June 30, 2002 from $528.6 million at June 30, 2001 primarily due to the decrease in cash and cash equivalents to fund acquisitions. Our current ratio, defined as total current assets divided by total current liabilities, was 1.8 and 2.9, and our debt to capitalization ratio was 25.3% and 42.4% at June 30, 2002 and 2001, respectively.

Certain of our state and local government contracts require we execute surety bonds or letters of credit to ensure that the project is administered and completed as provided for in the contract. Prior to September 11 and the well-documented bankruptcies of several large companies (e.g. Enron, Kmart, and WorldCom), surety bonds were obtainable on relatively favorable terms at minimal pricing. In late 2001, the market for surety bonds changed dramatically with capacity tightening and prices increasing. The long-term outlook of the surety market, while improving, remains unclear. As of June 30, 2002, we have outstanding surety bonds and letters of credit of $316.6 million and $100.9 million, respectively, to secure our performance of contractual obligations with our clients.

Notwithstanding the existing condition of the surety bond market, management believes that we have sufficient liquidity from our cash flow and under our revolving credit facility to meet ongoing business needs and to respond to future requests for proposals from state and local governments.

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As of June 30, 2002, we held a minority preferred stock interest in DDH Aviation, Inc. (“DDH”), a corporate airplane brokerage company organized in 1997. DDH has a $48 million line of credit with Citicorp USA, Inc., for which we and our Chairman, in exchange for warrants to acquire additional voting stock, acted as guarantors. In addition, we obtained access to aircraft at favorable rates in consideration of our guaranty. ACS guaranteed up to $11.5 million of the line of credit, and our Chairman guaranteed up to $17.5 million of the line of credit. Subsequent to June 30, 2002, our Chairman assumed in full ACS’ guaranty obligations to Citicorp, and our guaranty to Citicorp was released in full at no cost to us. We have no further contingent liability related to DDH indebtedness.

Our management believes that available cash and cash equivalents, together with cash generated from operations and available borrowings under our revolving credit facility, will provide adequate funds for our anticipated internal growth needs, including working capital expenditures. Our management also believes that cash provided by operations will be sufficient to satisfy all existing debt obligations as they become due. However, we intend to continue our growth through acquisitions and from time to time to engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisition and expansion opportunities and how such opportunities will be financed.

Related Party Transactions

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

Disclosures about Contractual Obligations and Commercial Commitments as of June 30, 2002 (in thousands):

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent

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assets and liabilities, and the reported amounts of revenues and expenses. We base our estimates on historical experience and on various other assumptions or conditions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and may result in materially different results under different assumptions and conditions. We believe that the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition. During fiscal year 2001, we adopted Staff Accounting Bulletin 101 “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. We recognize revenues when persuasive evidence of an arrangement exists, the product has been shipped or the services have been provided to the client, the sales price is fixed or determinable, and collectibility is reasonably assured. The adoption of SAB 101 did not have a material impact on our results of operations.

Generally, information technology processing revenues are recognized as services are provided to the client. Revenues from annual maintenance contracts are deferred and recognized ratably over the maintenance period. Revenues from hardware sales are recognized upon delivery to the client and when uncertainties regarding customer acceptance have expired.

Revenues for business process outsourcing services are normally determined on the basis of the number of accounts or transactions processed.

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

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

The percentage-of-completion methodology involves recognizing revenue using the percentage of services completed, on a current cumulative cost to total cost basis, using a reasonably consistent profit margin over the period. Due to the long-term nature of these contracts, developing the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the contract include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed, the impact of delayed performance, and availability and timing of funding from the client. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, and any revisions are charged to income in the period in which the facts that give rise to that revision become known. During the fiscal year ended June 30, 2002, less than 5% of our revenues were derived from percentage-of-completion contracts.

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

Valuation of goodwill and intangibles. Our business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we could incur.

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The determination of the value of goodwill and other intangibles requires us to make estimates and assumptions about future business trends and growth. For the IMS, Andersen, and AFSA acquisitions in 2002, we obtained a third- party valuation of the intangible assets. If an event occurs which would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill or other intangibles, such revision could result in an impairment charge that could have a material impact on our financial results.

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

New Accounting Standards

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which changes the rules for how companies must account for costs associated with exit or disposal activities. Costs typically associated with exit or disposal activities include one-time employee termination costs, contract cancellation provisions, and relocation costs. SFAS 146 nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. We do not believe that SFAS 146 will have a material impact on our future earnings and financial condition.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other things, SFAS 145 rescinds both Statement of Financial Accounting Standards No. 4 (“SFAS 4”), “Reporting Gains and Losses from Extinguishment of Debt,” and the amendment to SFAS 4, Statement of Financial Accounting Standards No. 64 (“SFAS 64”), “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. We do not believe SFAS 145 will have a material impact on our future earnings and financial position.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 retains the fundamental provisions of existing generally accepted accounting principles with respect to the recognition and measurement of long-lived asset impairment contained in Statement of Financial Accounting Standards No. 121 (“SFAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, SFAS No. 144 provides new guidance intended to address certain significant implementation issues associated with SFAS 121, including expanded guidance with respect to appropriate cash flows to be used to determine whether recognition of any long-lived asset impairment is required and if required, how to measure the amount of the impairment. SFAS 144 also requires that any net assets to be disposed of by sale be reported at the lower of carrying value or fair market value less cost to sell, and expands the reporting of discontinued operations to include any component of an entity with operations and cash flows that can be clearly distinguished from the rest of the entity. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. We do not believe SFAS 144 will have a material impact on our future earnings and financial position.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 addresses the accounting and reporting of acquired goodwill and other intangible assets. SFAS 142 discontinues amortization of acquired goodwill and instead requires annual impairment testing of acquired goodwill. Intangible assets will be amortized over their useful economic life and tested for impairment in accordance with SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Intangible assets with an indefinite useful economic life should not be amortized until the life of the asset is determined to be finite. We adopted SFAS 142 effective July 1, 2001. SFAS 142 has had

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a significant favorable impact on our fiscal year 2002 financial results through the elimination of goodwill amortization. See Note 6 of the Notes to Consolidated Financial Statements for further discussion of the impact of SFAS 142.

Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 requires that all business combinations be accounted for under the purchase method and defines the criteria for identifying intangible assets for recognition apart from goodwill. SFAS 141 applies to all business combinations initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001 or later. We have adopted SFAS 141 effective July 1, 2001. We do not believe SFAS 141 will have a material impact on our future earnings or financial position.

Risks Related to our Business

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

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

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

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

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

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

Loss of significant software vendor relationships. Our ability to service our clients depends to a large extent on our use of various software programs that we license from a small number of primary software vendors. If our significant software vendors were to terminate or refuse to renew our contracts with them, we might not be able to

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replace the related software programs and would be unable to serve our clients, which could have a material adverse effect on our revenues and profitability.

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

Exercise by government clients of termination rights. Approximately 26% of our fiscal 2002 revenues were derived from contracts with the United States government and its agencies, and approximately 41% of our fiscal 2002 revenues were derived from contracts with state and local governments and their agencies. Governments may terminate most of these contracts at any time, without cause. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we improperly charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government.

Budget deficits at state and local governments and their agencies. Approximately 41% of our revenues in fiscal year 2002 were derived from contracts with state and local governments and their agencies. Currently, many state and local governments that we have contracts with are facing potential budget deficits. While this has not had a material adverse impact on our results of operations through fiscal 2002, it is unclear what impact, if any, these deficits may have on our future results of operations.

Inability to provide contract performance guarantees. Certain of our state and local government contracts require we execute surety bonds or letters of credit to ensure that the project is administered and completed as provided for in the contract. Prior to September 11 and the well-documented bankruptcies of several large companies (e.g. Enron, Kmart, and WorldCom), surety bonds were obtainable on relatively favorable terms at minimal pricing. In late 2001, the market for surety bonds changed dramatically with capacity tightening and prices increasing. In certain situations, we have found it more economical to satisfy our obligations under certain state and local contracts with letters of credit under our revolving credit facility. The long-term outlook of the surety market, while improving, remains unclear. We may not have enough capacity under our revolving credit facility to continue doing this in the future, and therefore, profitability under our existing contracts may deteriorate, and we may not be able to bid on state and local contracts in the future.

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have fixed rate and variable rate debt instruments. Our variable rate debt instruments are subject to market risk from changes in interest rates. During the first half of fiscal year 2002, in order to manage interest costs and exposure to changing interest rates related to our $450 million revolving line of credit, we held two interest rate hedges initiated in December 1998. These hedges expired in December 2001. Each hedge was designated a cash flow hedge and was structured such that we paid a fixed rate of interest of 4.54% on amounts owed under the revolving

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line of credit up to the notional amount, and received a floating rate of interest based on one month LIBOR. The notional amount of the two hedges totaled $100 million and expired in December 2001. Changes in the fair value of the interest rate hedges, net of tax effect, is reflected in accumulated other comprehensive income.

We held a single investment in a marketable security during fiscal year 2002. To protect ourselves from the volatility of the value of this marketable security investment, we entered into a no-cost collar agreement in June 2001, which matured in June 2002. The collar, a fair value hedge, is structured so that all fluctuations in the price of the marketable security above or below 100% or 102.5% of its value on the date the collar was entered into are hedged. This marketable security investment was liquidated as of June 30, 2002, and the related collar was terminated.

We do not hold or issue derivative financial instruments for trading purposes and are not a party to any leveraged derivative transactions. Sensitivity analysis is one technique used to measure the impact of changes in the interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on our future earnings, fair value, or cash flows.

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REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Affiliated Computer Services, Inc. and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 1 and 6 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in connection with its adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective July 1, 2001.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
July 30, 2002

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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)

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

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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share amounts)

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

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