##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from            to
 Commission File Number 0-22495
 PEROT SYSTEMS CORPORATION
  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    75-2230700
(IRS Employer
Identification No.)
 
 
 þ o
  þLarge accelerated filer
    
    oAccelerated filer
    
    oNon-accelerated filer
 o þ




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##### 



PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31,
2005
    
    
    1Condensed Consolidated Income Statements for the three and six months
ended June 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    26ITEM 4: CONTROLS AND PROCEDURES
    
    
    26PART II: OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGS
    
    
    27ITEM 1A: RISK FACTORS
    
    
    28ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    28ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    28ITEM 6: EXHIBITS
    
    
    29SIGNATURES
    
    
    31Form of Change-in-Control Severance AgreementRule 13a-14 CertificationRule 13a-14 CertificationSection 1350 CertificationSection 1350 Certification




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perot systems corporation and subsidiaries
 
 condensed consolidated balance sheets
 as of June 30, 2006 and december 31, 2005
 (dollars in thousands)
 (unaudited)
 June 30, 2006
    
    
    December 31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    250,738
    
    
    $
    259,598Accounts receivable, net
    
    
    339,951
    
    
    
    277,780Prepaid expenses and other
    
    
    71,941
    
    
    
    65,974Total current assets
    
    
    662,630
    
    
    
    603,352Property, equipment and purchased software, net
    
    
    191,943
    
    
    
    180,036Goodwill
    
    
    462,231
    
    
    
    443,439Deferred contract costs, net
    
    
    94,874
    
    
    
    85,313Other non-current assets
    
    
    54,928
    
    
    
    58,480Total assets
    
    $
    1,466,606
    
    
    $
    1,370,620LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    55,281
    
    
    $
    38,680Deferred revenue
    
    
    43,180
    
    
    
    28,035Accrued compensation
    
    
    41,685
    
    
    
    60,024Income taxes payable
    
    
    37,428
    
    
    
    51,064Accrued and other current liabilities
    
    
    99,976
    
    
    
    81,812Total current liabilities
    
    
    277,550
    
    
    
    259,615Long-term debt
    
    
    76,505
    
    
    
    76,505Non-current deferred revenue
    
    
    58,262
    
    
    
    47,143Other non-current liabilities
    
    
    26,965
    
    
    
    26,822Total liabilities
    
    
    439,282
    
    
    
    410,085Commitments and contingenciesStockholders equity:Common stock
    
    
    1,217
    
    
    
    1,205Additional paid-in capital
    
    
    508,781
    
    
    
    502,443Retained earnings
    
    
    542,849
    
    
    
    494,082Treasury stock
    
    
    (36,004
    )
    
    
    (35,332
    )Deferred compensation
    
    
    
    
    
    
    (11,394
    )Accumulated other comprehensive income
    
    
    10,481
    
    
    
    9,531Total stockholders equity
    
    
    1,027,324
    
    
    
    960,535Total liabilities and stockholders equity
    
    $
    1,466,606
    
    
    $
    1,370,620
  Page 1




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED INCOME STATEMENTS
 for the three and six months ended June 30, 2006 and 2005
 (dollars and shares in thousands, except per share data)
 (unaudited)
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    572,030
    
    
    $
    488,232
    
    
    $
    1,114,459
    
    
    $
    961,503Direct cost of services
    
    
    462,772
    
    
    
    378,744
    
    
    
    906,499
    
    
    
    748,253Gross profit
    
    
    109,258
    
    
    
    109,488
    
    
    
    207,960
    
    
    
    213,250Selling, general and administrative expenses
    
    
    69,489
    
    
    
    59,702
    
    
    
    133,550
    
    
    
    119,826Operating income
    
    
    39,769
    
    
    
    49,786
    
    
    
    74,410
    
    
    
    93,424Interest income
    
    
    1,983
    
    
    
    1,596
    
    
    
    4,037
    
    
    
    3,839Interest expense
    
    
    (1,138
    )
    
    
    (760
    )
    
    
    (2,118
    )
    
    
    (1,605
    )Other income (expense), net
    
    
    79
    
    
    
    279
    
    
    
    720
    
    
    
    (13
    )Income before taxes
    
    
    40,693
    
    
    
    50,901
    
    
    
    77,049
    
    
    
    95,645Provision for income taxes
    
    
    14,844
    
    
    
    18,315
    
    
    
    28,282
    
    
    
    36,617Net income
    
    $
    25,849
    
    
    $
    32,586
    
    
    $
    48,767
    
    
    $
    59,028Basic and diluted earnings per common share:Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.41
    
    
    $
    0.50Weighted average common shares outstanding
    
    
    119,388
    
    
    
    117,622
    
    
    
    119,017
    
    
    
    117,663Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.27
    
    
    $
    0.40
    
    
    $
    0.48Weighted average diluted common shares outstanding
    
    
    121,949
    
    
    
    121,453
    
    
    
    121,766
    
    
    
    121,928
  Page 2




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 for the six months ended june 30, 2006 and 2005
 (dollars in thousands)
 (unaudited)
 Six months ended June 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    48,767
    
    
    $
    59,028Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    37,897
    
    
    
    26,721Stock-based compensation
    
    
    8,486
    
    
    
    1,265Change in deferred taxes
    
    
    6,647
    
    
    
    3,164Excess tax benefits from stock-based compensation arrangements
    
    
    (1,969
    )
    
    
    Other non-cash items
    
    
    (213
    )
    
    
    1,797Changes in assets and liabilities (net of effects from acquisitions
of businesses):Accounts receivable, net
    
    
    (55,893
    )
    
    
    (34,288
    )Prepaid expenses
    
    
    (11,348
    )
    
    
    (16,568
    )Deferred contract costs, net
    
    
    (14,616
    )
    
    
    (24,183
    )Accounts payable and accrued liabilities
    
    
    31,160
    
    
    
    (1,214
    )Accrued compensation
    
    
    (19,626
    )
    
    
    (17,696
    )Deferred revenue
    
    
    26,161
    
    
    
    19,597Income taxes
    
    
    (8,816
    )
    
    
    7,658Other current and non-current assets
    
    
    1,799
    
    
    
    5,976Other current and non-current liabilities
    
    
    (320
    )
    
    
    1,184Net cash provided by operating activities
    
    
    48,116
    
    
    
    32,441Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (36,174
    )
    
    
    (33,437
    )Acquisitions of businesses, net
    
    
    (29,030
    )
    
    
    (26,128
    )Other
    
    
    37
    
    
    
    52Net cash used in investing activities
    
    
    (65,167
    )
    
    
    (59,513
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    
    
    
    
    (75,498
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    76,505Proceeds from issuance of common and treasury stock
    
    
    20,421
    
    
    
    10,322Excess tax benefits from stock-based compensation arrangements
    
    
    1,969
    
    
    
    Purchases of treasury stock
    
    
    (16,502
    )
    
    
    (20,639
    )Other
    
    
    81
    
    
    
    (766
    )Net cash provided by (used in) financing activities
    
    
    5,969
    
    
    
    (10,076
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,222
    
    
    
    (3,294
    )Net decrease in cash and cash equivalents
    
    
    (8,860
    )
    
    
    (40,442
    )Cash and cash equivalents at beginning of period
    
    
    259,598
    
    
    
    304,786Cash and cash equivalents at end of period
    
    $
    250,738
    
    
    $
    264,344
  Page 3




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Significant Accounting Standards to be Adopted
 FASB Interpretation No. 48
     Page 4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
    ConsultingandIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    TotalBalance as of December 31, 2005
    
    $
    250,208
    
    
    $
    127,552
    
    
    $
    65,679
    
    
    $
    443,439Estimated goodwill from eServ acquisition
    
    
    12,054
    
    
    
    
    
    
    
    
    
    
    
    12,054Additional goodwill for TAG acquisition
    
    
    7,570
    
    
    
    
    
    
    
    
    
    
    
    7,570Reclassification of goodwill due to
change in reporting units
    
    
    (15,471
    )
    
    
    
    
    
    
    15,471
    
    
    
    Other
    
    
    
    
    
    
    (25
    )
    
    
    (807
    )
    
    
    (832
    )Balance as of June 30, 2006
    
    $
    254,361
    
    
    $
    127,527
    
    
    $
    80,343
    
    
    $
    462,231
   Deferred contract costs, net
   Page 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
 Identifiable intangible assets
  As of June 30, 2006Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    ValueService mark
    
    $
    6,697
    
    
    $
    (4,694
    )
    
    $
    2,003Customer-based intangible assets
    
    
    38,149
    
    
    
    (18,371
    )
    
    
    19,778Other intangible assets
    
    
    7,153
    
    
    
    (4,632
    )
    
    
    2,521Total
    
    $
    51,999
    
    
    $
    (27,697
    )
    
    $
    24,302
    Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    25,849
    
    
    $
    32,586
    
    
    $
    48,767
    
    
    $
    59,028Foreign currency translation adjustments
    
    
    956
    
    
    
    2,486
    
    
    
    931
    
    
    
    3,556Other
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    Total comprehensive income
    
    $
    26,824
    
    
    $
    35,072
    
    
    $
    49,717
    
    
    $
    62,584
    Stock-based compensation
  Page 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
    Three months
    
    
    Six monthsended
    
    
    endedJune 30, 2006
    
    
    June 30, 2006Direct cost of services
    
    $
    1,487
    
    
    $
    3,043Selling, general and administrative expenses
    
    
    2,327
    
    
    
    4,345Total stock compensation expense from stock options and ESPP
    
    
    3,814
    
    
    
    7,388Stock compensation expense from stock options and ESPP, net of tax
    
    
    2,570
    
    
    
    4,934Decrease in diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.04
   Three months
    
    
    Six monthsended
    
    
    endedJune 30, 2005
    
    
    June 30, 2005Net incomeAs reported
    
    $
    32,586
    
    
    $
    59,028Add: stock-based compensation expense
included in reported net income, net
of related tax effects
    
    
    345
    
    
    
    798Less: total stock-based employee
compensation expense determined under
fair value based methods for all
awards, net of related tax effects
    
    
    (4,274
    )
    
    
    (7,715
    )Pro forma
    
    $
    28,657
    
    
    $
    52,111Basic earnings per common shareAs reported
    
    $
    0.28
    
    
    $
    0.50Pro forma
    
    $
    0.24
    
    
    $
    0.44Diluted earnings per common shareAs reported
    
    $
    0.27
    
    
    $
    0.48Pro forma
    
    $
    0.24
    
    
    $
    0.43
 Page 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
  Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005Weighted average risk free interest rates
    
    
    5.00
    %
    
    
    3.77
    %
    
    
    4.76
    %
    
    
    3.82
    %Weighted average life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.2
    
    
    
    5.2Volatility
    
    
    32
    %
    
    
    43
    %
    
    
    35
    %
    
    
    43
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value
per share of options granted
    
    $
    5.51
    
    
    $
    5.81
    
    
    $
    5.94
    
    
    $
    6.12
  Description of stock-based compensation plans
  2001 Long-Term Incentive Plan
  Employee Stock Purchase Plan
  Page 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
  2006 Non-Employee Director Equity Compensation Plan
  1996 Non-Employee Director Stock Option/Restricted Stock Plan
  1991 Stock Option Plan
  Page 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
 Activity in our stock-based compensation plans
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (in Years)
    
    
    ValueOutstanding at January 1, 2006
    
    
    25,342
    
    
    $
    14.81Granted
    
    
    83
    
    
    
    15.00Exercised
    
    
    (1,885
    )
    
    
    8.55Forfeited
    
    
    (4,409
    )
    
    
    21.05Outstanding at June 30, 2006
    
    
    19,131
    
    
    
    14.00
    
    
    
    4.66
    
    
    $
    48,670Exercisable at June 30, 2006
    
    
    10,198
    
    
    
    15.04
    
    
    
    4.35
    
    
    
    28,717
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining
    
    
    
    
    
    
    ExerciseRange of Prices
    
    Number
    
    
    Price
    
    
    Life
    
    
    Number
    
    
    Price$0.25 - $5.00
    
    
    1,457
    
    
    $
    2.18
    
    
    
    1.52
    
    
    
    902
    
    
    $
    2.10$5.01 - $10.00
    
    
    2,799
    
    
    
    9.69
    
    
    
    5.32
    
    
    
    2,128
    
    
    
    9.69$10.01 - $15.00
    
    
    8,526
    
    
    
    12.45
    
    
    
    4.72
    
    
    
    2,640
    
    
    
    11.69$15.01 - $20.00
    
    
    2,494
    
    
    
    16.36
    
    
    
    5.14
    
    
    
    1,041
    
    
    
    16.89$20.01 - $25.00
    
    
    3,855
    
    
    
    23.49
    
    
    
    4.92
    
    
    
    3,487
    
    
    
    23.64Total
    
    
    19,131
    
    
    
    14.00
    
    
    
    4.66
    
    
    
    10,198
    
    
    
    15.04
  Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005Aggregate intrinsic
value of Class A
stock options
exercised and
restricted stock
units vesting
    
    $
    5,463
    
    
    $
    3,853
    
    
    $
    11,908
    
    
    $
    9,815Income tax benefits
from the exercise
of Class A stock
options
    
    $
    2,576
    
    
    $
    871
    
    
    $
    3,624
    
    
    $
    1,278Cash received from
our stock-based
compensation
arrangements
    
    $
    8,451
    
    
    $
    5,453
    
    
    $
    20,208
    
    
    $
    9,044
  Page 10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
       Page 11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
  Consulting andIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Other
    
    TotalFor the three months ended June 30, 2006:Revenue
    
    $
    449,574
    
    
    $
    71,329
    
    
    $
    62,785
    
    
    $
    (11,658
    )
    
    $
    572,030Income before taxes
    
    
    26,380
    
    
    
    5,509
    
    
    
    8,111
    
    
    
    693
    
    
    
    40,693For the three months ended June 30, 2005:Revenue
    
    $
    373,383
    
    
    $
    67,343
    
    
    $
    58,089
    
    
    $
    (10,583
    )
    
    $
    488,232Income before taxes
    
    
    40,346
    
    
    
    3,739
    
    
    
    7,304
    
    
    
    (488
    )
    
    
    50,901For the six months ended June 30, 2006:Revenue
    
    $
    867,664
    
    
    $
    147,403
    
    
    $
    121,990
    
    
    $
    (22,598
    )
    
    $
    1,114,459Income before taxes
    
    
    49,041
    
    
    
    10,068
    
    
    
    16,207
    
    
    
    1,733
    
    
    
    77,049For the six months ended June 30, 2005:Revenue
    
    $
    737,784
    
    
    $
    130,148
    
    
    $
    113,679
    
    
    $
    (20,108
    )
    
    $
    961,503Income before taxes
    
    
    74,606
    
    
    
    7,360
    
    
    
    14,509
    
    
    
    (830
    )
    
    
    95,645
     Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Earnings per Common ShareNet income
    
    $
    25,849
    
    
    $
    32,586
    
    
    $
    48,767
    
    
    $
    59,028Weighted average common shares
outstanding
    
    
    119,388
    
    
    
    117,622
    
    
    
    119,017
    
    
    
    117,663Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.41
    
    
    $
    0.50Diluted Earnings per Common ShareNet income
    
    $
    25,849
    
    
    $
    32,586
    
    
    $
    48,767
    
    
    $
    59,028Weighted average common shares
outstanding
    
    
    119,388
    
    
    
    117,622
    
    
    
    119,017
    
    
    
    117,663Incremental shares assuming dilution
    
    
    2,561
    
    
    
    3,831
    
    
    
    2,749
    
    
    
    4,265Weighted average diluted common
shares outstanding
    
    
    121,949
    
    
    
    121,453
    
    
    
    121,766
    
    
    
    121,928$
    0.21
    
    
    $
    0.27
    
    
    $
    0.40
    
    
    $
    0.48
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
    Litigation
   IPO Allocation Securities Litigation
    Page 13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)  (UNAUDITED)
  Other
  Contract-related Contingencies
   Page 14




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 This quarterly report contains forward-looking statements. These statements relate to future events
or our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, forecasts, expects, plans,
anticipates, believes, estimates, predicts, potential, see, target, projects,
position, or continue or the negative of such terms and other comparable terminology. These
statements reflect our current expectations, estimates, and projections. These statements are not
guarantees of future performance and involve risks, uncertainties, and assumptions that are
difficult to predict. Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including the risks described in our Annual Report on Form
10-K for the year ended December 31, 2005. These risk factors describe reasons why our actual
results may differ materially from any forward-looking statement. We disclaim any intention or
obligation to update any forward-looking statement.
 
  RESULTS OF OPERATIONS
  Lines of Business
  Overview of Our Financial Results for the Second Quarter of 2006
   Page 15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Revenue Growth
  
    
    A net increase in revenue from the expansion of base services and
discretionary technology investments by our existing long-term
customers.
    
    Revenue from companies acquired during the twelve-month period
following the second quarter of 2005.
    
    Revenue from new contracts signed during the twelve-month period
following the second quarter of 2005.
 Earnings Growth
  
    
    During the second quarter of 2005, we recorded a reduction to direct cost of services of
$10.3 million, or $0.05 per diluted share, associated with the settlement of a dispute with a
former customer related to a contract we exited in 2003.
 
    
    In the second quarter of 2006, we incurred a $7.5 million loss on an infrastructure
services contract with a Commercial Solutions customer, which decreased our gross profit from
this contract by $7.7 million as compared to the second quarter of 2005, or approximately
$0.04 per diluted share.
 
    
    Effective January 1, 2006, we adopted FAS 123R, Share-Based Payment, which requires
employee stock options and rights to purchase shares under stock participation plans to be
accounted for under the fair value method and eliminates the ability to account for these
instruments under the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, which was allowed under the original
provisions of FAS 123, Accounting for Stock-Based Compensation. As a result, during the
second quarter of 2006, we recorded additional stock compensation expense of $3.8 million
($2.6 million net of tax) as compared to the second quarter of 2005, which reduced our
earnings by approximately $0.02 per diluted share. Of this additional stock compensation
expense, $1.5 million was recorded in direct cost of services and $2.3 million was recorded in
selling, general and administrative expenses.
 Free Cash Flow
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Twelve MonthsEndedJune 30,2006
    
    
    2005Net cash provided by operating activities
    
    $
    165.4
    
    
    $
    172.1Purchases of property, equipment and software
    
    
    (73.1
    )
    
    
    (52.2
    )Free cash flow
    
    $
    92.3
    
    
    $
    119.9
  TCV of Contracts Signed
   Additional Measurements
  Comparison of the Three Months Ended June 30, 2006 and 2005
 Revenue
  Three Months Ended June 30,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    449.6
    
    
    $
    373.4
    
    
    $
    76.2
    
    
    
    20.4
    %Government Services
    
    
    71.3
    
    
    
    67.3
    
    
    
    4.0
    
    
    
    5.9
    %Consulting and Applications Solutions
    
    
    62.8
    
    
    
    58.1
    
    
    
    4.7
    
    
    
    8.1
    %Elimination of intersegment revenue
    
    
    (11.7
    )
    
    
    (10.6
    )
    
    
    (1.1
    )
    
    
    10.4
    %Total
    
    $
    572.0
    
    
    $
    488.2
    
    
    $
    83.8
    
    
    
    17.2
    %
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Industry Solutions
  
    
    $35.1 million net increase from existing accounts and short-term
project work. This net increase resulted from expanding our base
services to existing long-term customers and from providing additional
discretionary services to these customers. The discretionary services
that we provide, which include short-term project work, can vary from
period-to-period depending on many factors, including specific
customer and industry needs and economic conditions. This increase was
primarily related to contracts in the healthcare industry.
    
    $22.8 million increase from revenue related to acquisitions within our
Commercial Solutions group during the twelve-month period following
the second quarter of 2005, including a provider of policy
administration and business process services to the life insurance and
annuity industry and a provider of product engineering outsourcing
services.
 
    
    $18.3 million increase from new contracts signed during the twelve-month period following
the second quarter of 2005. This increase was composed of $17.0 million and $1.3 million from
new contracts signed in the Healthcare and Commercial Solutions groups, respectively. The
services that we are providing to these new customers are primarily the same services that we
provide to the majority of our other long-term outsourcing customers.
  
    
    Our solutions for the healthcare market were developed over several years and are highly
customized to the specific business needs of the market. We identified certain aspects of the
healthcare market as core to our long-term service offerings several years ago when the market
for technology and business process services was immature. As a result, we have an established
presence and brand, which we have strengthened primarily through internal investments in
software and solutions.
 
    
    The healthcare industry continues to be in a state of change as health systems look to
transform their clinical and administrative back-office operations, payer organizations work
to develop new consumer-based health models, and as the rate of medical cost inflation
continues to be high. Clinical transformation revolutionizes the way in which the healthcare
community receives patient-specific data that spans the entire continuum of care, including
centralization of patient data and electronic order entry and decision support.
 Government Services
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Consulting and Applications Solutions
  UBS
  Three Months EndedJune 30,2006
    
    
    2005
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    67.6
    
    
    $
    67.7
    
    
    
    (0.1
    %)UBS revenue in Consulting and Applications Solutions
    
    
    10.9
    
    
    
    8.5
    
    
    
    28.2
    %Total revenue from UBS
    
    $
    78.5
    
    
    $
    76.2
    
    
    
    3.0
    %
  Gross Margin
  
    
    In the second quarter of 2005, we settled a dispute with a former customer. As a result, we
received a $7.6 million payment and reduced our liabilities by $2.7 million, both of which
were recorded as a reduction to direct cost of services. The dispute related to a contract we
exited in 2003. This settlement resulted in a 2.1 percentage point increase in our gross
margin for the second quarter of 2005.
 
    
    A $7.7 million decrease in gross profit from an infrastructure
services contract with a Commercial Solutions customer. This decrease
was due to a $7.5 million loss on this contract that we incurred in
the second quarter of 2006, which reduced our gross margin for the
second quarter of 2006 by 1.3 percentage points.
    
    In the second quarter of 2006, we recorded $1.5 million of additional
stock compensation expense in direct cost of services as compared to
the prior year period as a result of our adoption of FAS 123R.
 Selling, General and Administrative Expenses
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
  Provision for Income Taxes
  Comparison of the Six Months Ended June 30, 2006 and 2005
 Revenue
  Six Months Ended June 30,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    867.7
    
    
    $
    737.8
    
    
    $
    129.9
    
    
    
    17.6
    %Government Services
    
    
    147.4
    
    
    
    130.1
    
    
    
    17.3
    
    
    
    13.3
    %Consulting and Applications Solutions
    
    
    122.0
    
    
    
    113.7
    
    
    
    8.3
    
    
    
    7.3
    %Elimination of intersegment revenue
    
    
    (22.6
    )
    
    
    (20.1
    )
    
    
    (2.5
    )
    
    
    12.4
    %Total
    
    $
    1,114.5
    
    
    $
    961.5
    
    
    $
    153.0
    
    
    
    15.9
    %
 Industry Solutions
  
    
    $60.6 million net increase from existing accounts and short-term
project work. This net increase resulted from expanding our base
services to existing long-term customers and from providing additional
discretionary services to these customers. The discretionary services
that we provide, which include short-term project work, can vary from
period-to-period depending on many factors, including specific
customer and industry needs and economic conditions. This increase was
primarily related to contracts in the healthcare industry.
    
    $38.4 million increase from revenue related to acquisitions within our
Commercial Solutions group during the twelve-month period following
the second quarter of 2005, including a provider of policy
administration and business process services to the life insurance and
annuity industry and a provider of product engineering outsourcing
services.
    
    $30.9 million increase from new contracts signed during the
twelve-month period following the second quarter of 2005. This
increase was composed of $28.2 million and $2.7 million from new
contracts signed in the Healthcare and Commercial Solutions groups,
respectively. The services that we are providing to these new
customers are primarily the same services that we provide to the
majority of our other long-term outsourcing customers.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Government Services
  Consulting and Applications Solutions
  UBS
  Six Months EndedJune 30,2006
    
    
    2005
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    132.5
    
    
    $
    130.6
    
    
    
    1.5
    %UBS revenue in Consulting and Applications Solutions
    
    
    19.1
    
    
    
    17.1
    
    
    
    11.7
    %Total revenue from UBS
    
    $
    151.6
    
    
    $
    147.7
    
    
    
    2.6
    %
  Gross Margin
  
    
    A $19.1 million decrease in gross profit from an infrastructure
services contract with a Commercial Solutions customer. This decrease
was due to a loss of $17.6 million on this contract that we incurred
in the first six months of 2006, which reduced our gross margin 1.6
percentage points for the six months ended June 30, 2006.
    
    In the second quarter of 2005, we settled a dispute with a former
customer. As a result, we received a $7.6 million payment and reduced
our liabilities by $2.7 million, both of which were recorded as a
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 reduction to direct cost of services. The dispute related to a contract we exited in 2003. This settlement
resulted in a 1.1 percentage point increase in our gross margin for the first six months of
2005.
    
    In the first quarter of 2005, we recorded revenue of $6.2 million and
related direct cost of services of $0.6 million, resulting in gross
profit of $5.6 million, associated with the termination of a contract.
This additional gross profit resulted in a 0.4 percentage point
decrease in our gross margin for the first six months ended June 30,
2005.
    
    In the first six months of 2006, we recorded $3.0 million of
additional stock compensation expense in direct cost of services as
compared to the prior year period as a result of our adoption of FAS
123R.
 Selling, General and Administrative Expenses
  Provision for Income Taxes
  Contract-related Contingencies
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
   Expected Effect of the End of Our Outsourcing Contract with UBS
   Recent Development
  Liquidity and Capital Resources
  Operating Activities
  
    
    We typically collect our accounts receivable within 45 days to 60 days, and therefore our
accounts receivable balance at the end of each period can change based on the amount of
revenue for that period and the timing of collections from our customers, which can vary
significantly from period to period.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
  
    
    Cash provided by the changes in accounts payable and accrued
liabilities was $31.2 million for the first six months of 2006 as
compared to cash used of $1.2 million for the same period of the prior
year. This change is primarily due to the timing of vendor payments.
    
    During the six months ended June 30, 2006, we made net cash payments
for income taxes of $30.1 million as compared to $25.1 million in the
first six months of 2005.
 Investing Activities
  
    
    During the six months ended June 30, 2006, we paid $29.0 million for
acquisitions of businesses, including $21.0 million for the
acquisition of eServ LLC, a provider of product engineering
outsourcing, and $8.0 million of additional consideration for the
acquisition of Technical Management, Inc.
    
    During the six months ended June 30, 2005, we paid $26.1 million for
acquisitions of businesses, including $17.0 million and $6.9 million
of additional consideration for the acquisitions of Soza & Company,
Ltd. and ADI Technology Corporation, respectively.
    
    During the six months ended June 30, 2006, we purchased $36.2 million
of property, equipment and purchased software as compared to $33.4
million during the six months ended June 30, 2005. This increase was
primarily related to our business expansion needs for data center and
office facilities. We plan to significantly increase our data center
capacity in the next 12 to 24 months, which could increase our future
capital expenditures from current levels and reduce the amount of our
available cash balances and borrowing capacity.
 Financing Activities
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Significant Accounting Standards to be Adopted
 FASB Interpretation No. 48
  Page 25




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IPO Allocation Securities Litigation
    Page 27




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Other
  
   
  Total Number
    
    Approximateof Shares
    
    Dollar Value ofTotal Number
    
    Average
    
    Purchased as
    
    Shares that Mayof Shares
    
    Price Paid
    
    Part of Publicly
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    per Share
    
    Announced Plans (1)
    
    Under the Plans (1)May 1, 2006  May 31, 2006
    
    
    372,800
    (2)
    
    $
    13.97
    
    
    
    372,800June 1, 2006  June 30, 2006
    
    
    808,282
    (2)
    
    $
    13.97
    
    
    
    807,600
    
    
    $
    16,300,000
 
 (1)
    
    On May 3, 2005, we announced that we initiated a $75 million stock buyback program. Pursuant
to the program, we may repurchase shares of our common stock from time to time in the open
market, under a Rule 10b5-1 plan, or through privately negotiated, block transactions, which
may include substantial blocks purchased from unaffiliated holders.(2)
    
    Shares of Class A Common Stock. 
   Nominee
    
    For
    
    WithheldRoss Perot
    
    
    80,779,939
    
    
    
    32,415,214Ross Perot, Jr
    
    
    109,476,510
    
    
    
    3,718,643Peter A. Altabef
    
    
    110,079,754
    
    
    
    3,115,399Steven Blasnik
    
    
    110,018,475
    
    
    
    3,176,678John S.T. Gallagher
    
    
    112,158,585
    
    
    
    1,036,568Carl Hahn
    
    
    109,556,043
    
    
    
    3,639,110DeSoto Jordan
    
    
    83,391,099
    
    
    
    29,804,054Thomas Meurer
    
    
    110,075,753
    
    
    
    3,119,400Cecil H. (C. H.) Moore, Jr
    
    
    112,154,401
    
    
    
    1,040,752Anthony J. Principi
    
    
    112,261,515
    
    
    
    933,638Anuroop (Tony) Singh
    
    
    110,068,890
    
    
    
    3,126,263
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EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT3.1
    
    Third Amended and Restated Certificate of Incorporation of Perot
Systems Corporation (the Company) (Incorporated by reference to
Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002.)3.2
    
    Fourth Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.2 of the Companys Current Report on Form 8-K filed
September, 24, 2004).4.1
    
    Specimen of Class A Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Companys Registration Statement
on Form S-1, Registration No. 333-60755.)4.2
    
    Rights Agreement dated January 28, 1999 between the Company and
The Chase Manhattan Bank (Incorporated by reference to Exhibit
4.2 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)4.3
    
    Form of Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock (included as Exhibit
A-1 to the Rights Agreement) (Incorporated by reference to
Exhibit 4.3 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)4.4
    
    Form of Certificate of Designation, Preferences, and Rights of
Series B Junior Participating Preferred Stock (included as Exhibit
A-2 to the Rights Agreement) (Incorporated by reference to
Exhibit 4.4 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)10.40*
    
    Form of Change-in-Control Severance Agreement10.41
    
    2006 Non-Employee Director Equity Compensation Plan dated
effective May 31, 2006 (Incorporated by reference to Exhibit 10.41
to the Companys Current Report on Form 8-K filed May 25, 2006.)31.1*
    
    Rule 13a-14 Certification dated August 1, 2006, by Peter A.
Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated August 1, 2006, by Russell
Freeman, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification dated August 1, 2006, by Peter A.
Altabef, President and Chief Executive Officer.
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EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT32.2**
    
    Section 1350 Certification dated August 1, 2006, by Russell
Freeman, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. Page 30




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PEROT SYSTEMS CORPORATION(Registrant)Date: August 1, 2006
    
    By /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and PrincipalAccounting Officer
 Page 31