We generally enter into long-term relationships with clients to provide services that meet their ongoing business requirements while supporting their mission critical business process or information technology needs. We derive our revenues from delivering comprehensive business process outsourcing and information technology solutions to commercial and government clients. A substantial portion of our revenues is derived from recurring monthly charges to our clients under service contracts with initial terms that vary from one to ten years. The recurring nature of our revenue provides us with a certain level of predictability with regards to our revenue streams during differing economic cycles. We define recurring revenues as revenues derived from services that our clients use each year in connection with their ongoing businesses, and accordingly, exclude non-recurring revenue related to software license fees, short-term contract programming and consulting engagements, product installation fees, and hardware and software sales. We may experience variations in our mix of recurring versus non-recurring revenues if we provide consulting or other services that are primarily short-term in nature. New Business Pipeline
Management focuses on various metrics in analyzing our business and its performance and outlook. One such metric is our sales pipeline, which was approximately $2.1 billion of annual recurring revenues as of December 31, 2008. Our sales pipeline includes potential business opportunities that we expect will be contracted within the next six months and excludes business opportunities with estimated annual recurring revenue that are in excess of $100 million. Both the Commercial and Government pipelines have significant, quality opportunities within our vertical markets and horizontal solutions. As of December 31, 2008, the Commercial segment comprised approximately 51% of our pipeline and the Government segment comprised the remaining 49%. By service line, approximately 81% of our pipeline is business process outsourcing and approximately 19% of the pipeline is information technology solutions as of December 31, 2008. The Commercial segment pipeline includes opportunities in information technology services, commercial healthcare, transactional business process outsourcing including customer care centers, human resources outsourcing, learning process outsourcing and finance and accounting outsourcing. The Government segment pipeline includes opportunities in our domestic and international transportation business, in the state and local market for information technology, eligibility and electronic payment services, in government healthcare and with the federal government.
While the size of our sales pipeline is an important indicator of potential new business signings and potential future internal revenue growth, actual new business signings and internal revenue growth depend on a number of factors including the effectiveness of our sales pursuit teams, competition for a deal, deal pricing, cash flow generation qualities of each deal and are subject to risks described further in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. New Business Signings
We define new business signings as estimated annual recurring revenue from new contracts and the incremental portion of renewals that are signed during the period, which represents the estimated first twelve months of revenue to be recorded under the contracts after full implementation. We use new business signings to forecast prospective revenues and to estimate capital commitments. Revenues for new business signings are measured under generally accepted accounting principles in the United States ("GAAP"). There are no third party standards or requirements governing the calculation of new business signings and our measure may not be comparable to similarly titled measures of other companies. We define total contract value as the estimated total revenues from contracts signed during the period. We use total contract value as an additional measure of estimating total revenue represented by contractual commitments, both to forecast prospective revenues and to estimate capital commitments. Revenues for annual recurring revenue and total contract value are measured under GAAP. During the three months ended December 31, 2008, we signed contracts with new clients and incremental business with existing clients representing $201.8 million of annual recurring revenue with an estimated $852.8 million in total contract value. The Commercial segment contributed 54% of the new contract signings (based on annual recurring revenues) including contracts with US Bank, Bridgepoint Education, Delta Air Lines, Inc., Ingersoll Rand and T-Mobile. The Government segment contributed 46% of the new contract signings (based on annual recurring revenues) including contracts with the Saudi Arabian Ministry of Interior for global transportation services and the Massachusetts Department of Workforce Development for electronic payment services. We continued to leverage our student loan processing solution with the Department of Education.

Internal Revenue Growth
We use internal revenue growth as a measure of the organic growth of our business. Internal revenue growth is measured as total revenue growth less revenues from acquisitions and revenues from divested operations. At the date of an acquisition, we identify the trailing twelve months of revenue of the acquired company as the "pre-acquisition revenue of acquired companies." Pre-acquisition revenue of the acquired companies is considered "acquired revenues" in our calculation, and actual revenues from the acquired company, either above or below "acquired revenues" are components of "internal growth" in our calculation. Revenues from divested operations are excluded from the internal revenue growth calculation in the periods following the effective date of the divestiture. We believe these adjustments to historical reported results are necessary to accurately reflect our internal revenue growth. Prior period internal revenue growth calculations are not restated for current period divestitures. Our measure of internal revenue growth may not be comparable to similarly titled measures of other companies. During the three months ended December 31, 2008, total revenue grew 7% over the prior year period, excluding divestitures, and internal revenue grew 4% over the prior year period. During the six months ended December 31, 2008, total revenue grew 8% over the prior year period, excluding divestitures, and internal revenue growth grew 4% over the prior year period.
Client Renewal Rates
We focus on the performance of our contractual obligations and continually monitor client satisfaction. Renewal rates are the best indicator of client satisfaction. We calculate our renewal rate based on the total annual recurring revenue of renewals won as a percentage of total annual recurring revenue of all renewals sought. During the three and six months ended December 31, 2008, we renewed approximately 94% and 86%, respectively, of total renewals sought, totaling $456.5 million and $760.8 million, respectively, of annual recurring revenue with a total contract value of approximately $1.3 billion and $2.4 billion, respectively. The decline of our renewal rate during the six months ended December 31, 2008 was primarily due to the non-renewal of the Georgia Medicaid contract, for which our protest of the award to a competitor was denied during the three months ended September 30, 2008. We will continue to earn revenue under our Georgia Medicaid contract until the end of fiscal year 2010. We do not expect a permanent drop in our renewal rates. Average contract life for renewals varies between our government and commercial segments. The average contract life of renewals in the government segment is often longer than those in the commercial segment.
Capital Intensity
Management responds to technological advances and the rapid changes in the requirements of our clients by committing substantial amounts of our resources to the operation of multiple hardware platforms, the customization of products and services that incorporate new technology and the continuous training of our personnel. Management continually assesses the capital intensity of these technological advances and client requirements, addressing the challenge to stay ahead of the competition with innovative solutions and provide a lower cost solution for clients.
We monitor the capital intensity of new business signings, which we define as the total of capital expenditures and additions to intangible assets as a percentage of revenue. The capital intensity of new business signings is critical to determine the future free cash flow generating levels of our business. Historically, the capital intensity in our business has ranged between 5% and 7% of revenue. During the six months ended December 31, 2008 and 2007, the overall capital intensity of our business was approximately 5.2% and 5.0% of revenues, respectively. We expect that as our new business signings ramp, we will incur capital expenditures associated with the new business, which could result in increased capital intensity over the fiscal year 2008 percentage, but we expect that the capital intensity will remain within our historical range. We believe the expected capital intensity range of our new business signings reflects a healthy competitive environment and the related risks we are taking with respect to our new business process outsourcing business and information technology solutions business.
Employees
Attracting, retaining and training our employees has been a key component to our historical success and will continue to be a major factor in our future success. Because we operate in intensely competitive markets, our success depends to a significant extent on our ability to attract, retain and motivate highly skilled and qualified personnel. We review our employee retention rates on a regional and global basis to ensure that we are competitive in hiring, retaining and motivating our employees. We utilize activity based compensation as a means to motivate certain of our employees in both segments of our business and believe our use of activity based compensation is a competitive advantage for ACS. Other
We identified a number of risk factors in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. Management monitors the general economic conditions, changes in technology and other developments in the markets we serve, competitive pricing trends and contractual terms for future impact on the Company in order to be able to respond effectively and on a timely basis to these developments.

We report our financial results in accordance with GAAP. However, we believe that certain non-GAAP financial measures and ratios, used in managing our business, may provide users of this financial information with additional meaningful comparisons between current results and prior reported results. Certain of the information set forth herein and certain of the information presented by us from time to time (including free cash flow and internal revenue growth) may constitute non-GAAP financial measures within the meaning of Regulation G adopted by the SEC. We have presented herein and we will present in other information we publish that contains any of these non-GAAP financial measures a reconciliation of these measures to the most directly comparable GAAP financial measure. The presentation of this non-GAAP information is not meant to be considered in isolation or as a substitute for comparable amounts determined in accordance with GAAP.
Significant Developments
Global Production Initiative
In October 2008, we announced plans to implement a global production initiative to lower future labor costs. Under this initiative, we intend to hire approximately 4,200 full-time employees in locations outside of the United States and reduce corresponding positions within the United States and Europe by the end of the first quarter of fiscal year 2010. The total pre-tax cost to reduce these employee positions under this initiative is estimated to be approximately $38.0 million to $42.0 million, of which severance costs are estimated to be approximately $14.0 million to $16.0 million and transition and other expenses are estimated to be approximately $24.0 million to $26.0 million. The transition costs consist primarily of duplicate labor costs as a result of job training and work shadowing, as well as related travel, retention and facility costs during the transition. We expect that substantially all of these expenses will be cash expenditures. The following table reflects the estimated charges over the term of the initiative for each of our segments (in thousands):

                                                        Commercial                           Government                           Corporate                              Total
Severance costs                                   $      12,000 - $13,000               $      2,000 - $3,000               $                   -               $      14,000 - $16,000
Transition and other expenses                            18,000 -  19,000                      4,000 -  5,000                      2,000 -  2,000                      24,000 -  26,000

Total costs                                       $      30,000 - $32,000               $      6,000 - $8,000               $      2,000 - $2,000               $      38,000 - $42,000

As of December 31, 2008, we have added approximately 2,000 positions outside the United States and reduced corresponding positions in the United States and Europe as a result of this initiative. We accrued severance costs of $12.9 million ($8.0 million, net of income tax) and incurred $3.8 million ($2.3 million, net of income tax) for transition and other expenses in cost of revenues in our Consolidated Statement of Income during the three months ended December 31, 2008. The following table reflects charges recorded during the period in each of our segments (in thousands):

                                                                                                  Three Months Ended December 31, 2008
                                                        Commercial                           Government                           Corporate                              Total
Accrued severance costs                           $                10,849               $               2,043               $                   -               $                12,892
Transition and other expenses                                       3,180                                 540                                  62                                 3,782

Total costs                                       $                14,029               $               2,583               $                  62               $                16,674

We anticipate using a substantial portion of the savings generated from this initiative to invest in innovation, sales and other client opportunities. Upon completion, we estimate the full annual run rate pre-tax savings will be approximately $40 million after these investments.
Additionally, we anticipate opening new facility sites and expanding current facilities globally in order to accommodate the increased offshore headcount. Capital expenditures related to these facilities are currently estimated at $15 million to $20 million over the next three quarters. During the three months ended December 31, 2008, we incurred $0.7 million in capital expenditures related to these facilities.
The following table reflects the activity for the accruals for involuntary termination of employees related to this initiative (in thousands):

                     Balance at September 30, 2008   $      -
                     Accruals                          12,892
                     Payments                          (1,189 )

                     Balance at December 31, 2008    $ 11,703

Acquisition
Please see Note 2 to our Consolidated Financial Statements for a discussion of our acquisition activity during the period. Supplemental Executive Retirement Agreement Please see Note 6 to our Consolidated Financial Statements for a discussion of the termination of the Supplemental Executive Retirement Plan Agreement (the "SERP Termination") with the Chairman of our Board of Directors. Deason/Cerberus Proposal
Please see Note 3 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for a discussion of the Deason/Cerberus proposal to purchase the Company.

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