8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
July 14, 2006

Affiliated Computer Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation) 1-12665
(Commission File Number) 51-0310342
(IRS Employer
Identification No.)

2828 North Haskell Avenue
Dallas, Texas 75204
(Address of principal executive offices, including zip code)

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

Not Applicable
(Former name or former address if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-14(c) under the Exchange Act (17 CFR 240.13e-14(c))

Item 8.01 Other Events

As we previously reported in our filings with the Securities and Exchange Commission (“SEC”), in April 2004, one of our subsidiaries, ACS State Healthcare, LLC (“ACS”), was awarded a contract by the North Carolina Department of Health and Human Services (“DHHS”) to replace and operate the North Carolina Medicaid Management Information System (“NCMMIS”). Protests were lodged by competing bidders, but at the request of the DHHS, we commenced to perform services under the contract. On June 6, 2006 DHHS sent a letter notifying us that they intended to terminate the contract if the alleged breaches were not cured. On June 12, 2006, we reported in a filing with the SEC, that contract issues have arisen and each of ACS and DHHS have alleged that the other party has breached the contract. The parties entered into a series of standstill agreements in order to permit discussion of their respective issues regarding the contract and whether the contract would be continued or terminated. On July 14, 2006, the DHHS sent us a letter notifying us of the termination of the contract. A copy of the letter from DHHS to us terminating the contract is attached to this filing as Exhibit 99.1. Attached to this filing as Exhibit 99.2 is a letter from us to the Department regarding the contract. We do not believe the agency has a valid basis for terminating the contract and intend to pursue legal action against DHHS. We have filed in the General Court of Justice, Superior Court Division, in Wake County, North Carolina, a complaint and motion to preserve records related to the contract. In that complaint, we have alleged, among other things, that DHHS’ actions caused significant delays in the project, that DHHS through its employees have taken affirmative action to withhold information from us and the public, and that DHHS failed to properly respond to our public records requests.

Prior to the assessment of this contract termination notice and subject to appropriate adjustments after such assessment, in the fiscal year ended June 30, 2006 we preliminarily recognized $6.4 million of revenue under the contract resulting in operating losses during the fiscal year. As of June 30, 2006 we had recorded unbilled revenue related to the contract of approximately $11 million. We are currently reviewing the impact of this notice of termination on the amounts currently outstanding and other potential costs to terminate the contract.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits.

EXHIBIT
NUMBER	DESCRIPTION
99.1	Termination Letter dated July 14, 2006 from North Carolina Department of Health and Human Services to ACS State Healthcare, LLC
99.2	Response letter dated July 12, 2006 from ACS State Healthcare, LLC to North Carolina Department of Health and Human Services regarding the contract

2

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	AFFILIATED COMPUTER SERVICES, INC.
Date: July 19, 2006	By:	/s/ WARREN D. EDWARDS
		Name:	Warren D. Edwards
		Title:	Executive Vice President and Chief Financial Officer

3

EX-99.1

Exhibit 99.1

July 14, 2006

Mr. John Crysler
ACS/Government Healthcare Solutions
9040 Roswell Road, Suite 700
Atlanta, Georgia 30350

RE  Final Termination of NCMMIS+ Agreement

Dear Mr. Crysler:

     Through my letter to you of June 6, 2006, the North Carolina Department of Health and Human Services (“NC DHHS”) notified ACS State Healthcare, LLC (“ACS”) of NC DHHS’ intent to terminate the NCMMIS+ Agreement entered into by and between NC DHHS and ACS on April 8, 2004 (“NCMMIS+ Agreement”). NC DHHS stated that it would terminate the NCMMIS+ Agreement unless ACS timely cured its breach thereof by (1) delivering in final, satisfactory form all contract deliverables then due under the NCMMIS+ Agreement, and (2) filling vacant ACS staff positions and otherwise augmenting ACS staff as required by the NCMMIS+ Agreement and its Corrective Action Plan. The letter established a cure deadline of June 16, 2006, which NC DHHS and ACS subsequently agreed to extend to July 13, 2006.

     ACS has failed to satisfy either of the above requirements for cure by the July 13, 2006 deadline. As a result of this failure and pursuant to Section 3.46.2 of the NCMMIS+ Agreement RFP, NC DHHS hereby gives ACS notice of NC DHHS’ termination of the NCMMIS+ Agreement for default, effective immediately.

     Pursuant to Section 3.46.7 of the NCMMIS+ Agreement RFP, NC DHHS hereby directs ACS to:

(1)	immediately cease all work under the NCMMIS+ Agreement;
(2)	protect and preserve the property related to the NCMMIS+ Contract which is in the possession or control of ACS, and in which the State of North Carolina has or may acquire an interest; and

(3) await direction from the NCMMIS+ Contract Administrator regarding:

(a)	assignment of terminated, third party orders and subcontracts;
(b)	settlement of outstanding liabilities and claims arising out of termination of third party orders and subcontracts;
(c)	transfer to the State of North Carolina of title and possession with respect to specific contract deliverables; and
(d)	destruction or return of information, data and materials provided to ACS by the State of North Carolina or its incumbent fiscal agent.

     Please be advised that the date of this letter marks the beginning of the one-month period for ACS’ submission of termination claims under Section 3.46.8 of the NCMMIS+ Agreement RFP. All claims shall be offset by the amount of damages and reductions in compensation that have accrued to the benefit of NC DHHS under the NCMMIS+ Agreement.

Sincerely,

Carmen Hooker Odom

cc:  Mart Tanner
Joel Mercer

EX-99.2

Exhibit 99.2

July 12, 2006

HAND DELIVERY

Ms. Carmen Hooker Odom
Secretary
N.C. Department of Health and Human Services
2001 Mail Service Center
Adams Building
101 Blair Drive
Raleigh, NC 27699-2001

Dear Secretary Hooker Odom:

     This letter is in response to your letter of June 6, 2006 from the North Carolina Department of Health and Human Services (the “Department”) to ACS State Healthcare, LLC (“ACS”) stating the Department’s Notice of Intent to Terminate the NCMMIS+ Agreement between the Department and ACS. The Department’s stated reasons for its Notice of Intent to Terminate, that ACS has materially breached the Agreement, has no validity and is directly contrary to recent actions of your office described in more detail below. The Department’s mismanagement at all levels is the primary cause of program delays and increased costs.

     Termination of the NCMMIS+ Agreement cannot be justified and, by the Department’s assessment as contained in a letter to the Centers for Medicare and Medicaid Services (“CMS”), would cost well over $100 million. The project is presently 60% complete. ACS has been and remains committed to continuing to build the new MMIS system for North Carolina which will save North Carolina many millions of dollars, including nearly $2 million a month in operating costs from the amount the State is wasting in order to pay EDS to operate the current system.

     There are several actions that the Department has taken recently that are inconsistent with the position stated in your letter of June 6^th that ACS has materially breached the NCMMIS+ Agreement. Some of these actions include:

     (1) As recently as May 18 of this year ACS responded to your request for a presentation of a proposal for the takeover of operations of the legacy MMIS system pending completion of the new system. As ACS discussed with you on several occasions, you recognized the benefits of having the same vendor operate the current system and build the new system. You expressed a desire to consider an ACS takeover, thereby greatly reducing the dependency on EDS to affect the

Ms. Carmen Hooker Odom
July 12, 2006
Page 2 of 5

smooth transition to the new system. Your request that ACS submit a proposal for takeover of existing operations, less than a month before your June 6^th letter, directly contradicts statements in your June 6^th letter concerning ACS’ performance.

     (2) The Department’s Notice of Intent to Terminate the NCMMIS+ Agreement is a complete reversal of the position that you communicated to ACS three business days earlier. You indicated to ACS in recent meetings and as late as a meeting held with ACS on June 1, 2006, that it is in the best interests of North Carolina, ACS, and the Department to work together to continue the contract and deliver a much needed new MMIS system. The ACS team departed the meeting on June 1^st with the direction from you to work with the Department to develop a jointly acceptable message to deliver to the Legislature and CMS describing an agreement that would include a partial payment to ACS for the additional costs incurred by ACS and the restructuring of the Department’s management.

     The Notice of Intent to Terminate, if implemented, will result in a costly lawsuit, ultimately the loss of many millions of dollars to the State, a substantial delay in the completion of a new MMIS, and damage to the reputations of Department personnel at all levels. In contrast, the additional cost to the State of continuing the contract under the terms discussed on June 1^st would have been only $1.8 million (the State pays only 10% of the additional cost of $18 million) and would result in implementation of a new, much needed system for North Carolina at a much earlier date saving the State nearly $2 million per month in operating costs. The Department’s termination of ACS’ contract is fiscally irresponsible and in plain terms makes no sense.

     The Department’s communication alleging that ACS is in material breach of the contract is a belated attempt to make it appear that the Department has performed the contract in compliance with its terms. That is not the case. The many ways in which the Department has failed to meet its contract obligations have been presented to you on numerous occasions over the past year and a half, including in the Equitable Adjustment Claim (“EA Claim”) presented earlier this year. On May 25, 2006 you received a communication from George Bakolia, North Carolina’s Chief Information Officer, mandating that the Department change its management structure and provide new project management or the contract would no longer be funded. Since January 2005, ACS has been discussing with you the Department’s need to change its management structure. It appears that your recent action giving Notice of Intent to Terminate the Contract with ACS is an effort to bypass the directive that the Department received from Mr. Bakolia.

     Since the beginning of the contract, the Department has acted as though it has no contract obligations and that it can impose requirements upon ACS that are both unreasonable and unsupported by the contract. To the contrary, the Department has numerous contract obligations

Ms. Carmen Hooker Odom
July 12, 2006
Page 3 of 5

which it has materially breached. ACS’ EA Claim addresses in great detail the numerous ways in which the Department has not complied with the parties’ contract which has been costly for ACS and prevented the parties from meeting the agreed upon schedule. These include:

• Time periods when the Department halted planned project activities

• Failure to provide required, qualified staffing timely to support the project

• The Department’s failure to provide necessary documentation and other information to ACS

• The Department’s failure to abide by the agreed upon deliverable review process

• The actions and attitude of the Department that it has no obligation to comply with the parties agreed upon schedule

• Additional resources that ACS was forced to add because of the Department’s failure to meet its contract responsibilities

• Work performed by ACS beyond the scope of the contract for which it has never been compensated

     ACS’ deliverables have been consistent with the contract specifications. However, rather than focusing on compliance with the deliverable specifications provided in the RFP as required, the Department’s comments frequently were not germane to the contractually established purpose of each deliverable and focused on cosmetic changes, changes to previously agreed upon content, and unnecessary wordsmithing. The Department, with its 90 plus member contract management team (5-6 times the number typically engaged on projects of this nature), has failed to follow the deliverable review process in the RFP and mandated laborious and time consuming processes and procedures that have unnecessarily extended the project schedule. As a result, it has taken an average of 108 days to review deliverables, rather than an average of 28 days if the Department had followed the contract provisions.

     The Department’s MMIS Project Director has stated on numerous occasions that adherence to the project schedule was not a priority. It is another indication of the extreme bad faith that characterizes your letter of June 6^th that you cite the provision of the RFP that “time is of the essence”. The Department has ignored this provision since the beginning of the contract. ACS agrees that time is of the essence and is committed to moving forward as quickly as possible. We encourage you to take the necessary actions that we have discussed to restructure the Department’s management team and modify unnecessary processes and procedures to facilitate timely completion.

Ms. Carmen Hooker Odom
July 12, 2006
Page 4 of 5

     Regarding staffing, ACS has added significantly more staff than originally anticipated because of demands made by the Department upon ACS that were outside the requirements of the Contract. The Corrective Action Plan that you referred to in connection with staffing has never been agreed upon. There also is not an approved Detailed Work Plan and, the Detailed System Design has not been approved. Despite the Department’s unwillingness to comply with its contractual obligations for the review and approval of these documents, ACS has, at its own risk, proceeded with the next stages of development and has currently completed over 30% of the construction of the new system. Staffing and the level of staffing is directly dependent upon having an approved Detailed System Design which has taken many more months to complete than anticipated because of the Department’s continuing requests for new changes.

     The facts also do not support any theory of anticipatory repudiation of the contract by ACS. Notwithstanding the Department’s continuing material breach of contract, ACS has consistently indicated a willingness and a desire to complete this project. In the communications you mention in the notice of intent to terminate, you fail to mention that ACS asked you and Dan Stewart whether limited project activities could be postponed due to discussions that would make changes impacting these activities. You never indicated that this was a problem. The fact that you are now citing these actions as grounds for termination is not only baseless, but shows a further absence of good faith. At the time of the communications you reference, the Department was considering a Contract amendment for a MITA-aligned NCLeads System in which you indicated an interest. If accepted, this change in the project would have made these limited project activities useless.

     The project is presently 60% complete. In spite of the Department’s actions that continue to delay completion of project activities, ACS is continuing with the activities necessary to complete the project in compliance with the terms and conditions of the contract. The final response to comments on the DSD was delivered to the State last Friday, July 7th. A letter to Sharon Smith addressing the specific deliverables mentioned in her recent letter is being delivered today. ACS continues to proceed with system construction and test planning activities which we have been performing at risk of modification due to the lack of an approved design. As noted, system construction activities are currently more than 30% complete.

     Due to the continued actions on the part of the State that have delayed approval of the DSD, the project work plan must be revised and a new baseline established. With the State’s approval of the DSD, ACS will initiate this process including an update of the staffing plan and project schedule and will immediately proceed to fill all required ACS staff positions. This effort should begin immediately with the full cooperation and active participation of necessary State staff. Assuming timely approval of the updated detailed project work plan by the Department, concentrating on critical-path activities, adding resources, implementing needed revisions to existing project processes, and taking prudent steps to streamline project activities, ACS anticipates being able to minimize the schedule impact.

Ms. Carmen Hooker Odom
July 12, 2006
Page 5 of 5

     ACS looks forward to receiving final approval of the DSD and working with the State to focus on the remaining activities necessary to complete the new MMIS system which will save North Carolina many millions of dollars and provide much needed, cost effective information technology services to the State.

Sincerely,

/s/ Tom Burlin

Tom Burlin
Executive Vice President and
Group President, Government Solutions
ACS Government Health Care Solutions